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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. Refet Gürkaynak & Brian Sack & Eric Swanson, 2004. "Do actions speak louder than words? the response of asset prices to monetary policy actions and statements," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-66, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Gilchrist, Simon & Lopez-Salido, J. David & Zakrajsek, Egon, 2013. "Monetary Policy and Real Borrowing Costs at the Zero Lower Bound," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-3, Board of Governors of the Federal Reserve System (U.S.).
  2. Challe, Edouard & Giannitsarou, Chryssi, 2011. "Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8387, C.E.P.R. Discussion Papers.
  3. Gertler, Mark & Karadi, Peter, 2014. "Monetary Policy Surprises, Credit Costs and Economic Activity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9824, C.E.P.R. Discussion Papers.
  4. Saleem Bahaj, 2014. "Systemic Sovereign Risk: Macroeconomic Implications in the Euro Area," Discussion Papers, Centre for Macroeconomics (CFM) 1406, Centre for Macroeconomics (CFM).

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