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High Frequency Identification of Monetary Non-Neutrality

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  • Emi Nakamura
  • Jón Steinsson

Abstract

We provide new evidence on the responsiveness of real interest rates and inflation to monetary shocks. Our identifying assumption is that the increase in the volatility of interest rate news in a 30-minute window surrounding scheduled Federal Reserve announcements arises from news about monetary policy. Nominal and real interest rates respond roughly one-for-one several years out into the term structure at these times, implying that changes in expected inflation are small. At longer horizons, the response of expected inflation grows. Accounting for “background noise” in interest rates on FOMC days is crucial in identifying the effects of monetary policy on interest rates, particularly at longer horizons. We show that in conventional business cycle models with nominal rigidities our estimates imply that monetary non-neutrality is large. We also find evidence that FOMC announcements provide the public with information not only about monetary policy but also about the evolution of exogenous economic fundamentals.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19260.

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Date of creation: Jul 2013
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Handle: RePEc:nbr:nberwo:19260

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  1. Carlo Rosa, 2012. "How "unconventional" are large-scale asset purchases? The impact of monetary policy on asset prices," Staff Reports 560, Federal Reserve Bank of New York.
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Cited by:
  1. Challe, E. & Giannitsarou, C., 2011. "Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach," Working papers 330, Banque de France.
  2. Mark Gertler & Peter Karadi, 2014. "Monetary Policy Surprises, Credit Costs and Economic Activity," NBER Working Papers 20224, National Bureau of Economic Research, Inc.
  3. Simon Gilchrist & David López-Salido & Egon Zakrajšek, 2014. "Monetary Policy and Real Borrowing Costs at the Zero Lower Bound," NBER Working Papers 20094, National Bureau of Economic Research, Inc.
  4. Saleem Bahaj, 2014. "Systemic Sovereign Risk: Macroeconomic Implications in the Euro Area," Discussion Papers 1406, Centre for Macroeconomics (CFM).

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