Advanced Search
MyIDEAS: Login to save this paper or follow this series

Signaling Effects of Monetary Policy

Contents:

Author Info

  • Leonardo Melosi

    ()
    (Federal Reserve Bank of Chicago)

Abstract

We develop a DSGE model in which the policy rate signals to price setters the central bank’s view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters’ inflation expectations. We find that the model fits the data better than a prototypical New Keynesian DSGE model because the signaling effects of monetary policy help the model account for the run-up in inflation expectations in the 1970s. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. The signaling effects of monetary policy have contributed (i ) to heightening inflation expectations in the 1970s, (ii ) to raising inflation and to exacerbating the recession during the first years of Volcker’s monetary tightening, and (iii ) to subduing inflation and to stimulating economic activity from 1991 through 2007.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://economics.sas.upenn.edu/system/files/13-029.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 13-029.

as in new window
Length: 55 pages
Date of creation: 01 Mar 2013
Date of revision:
Handle: RePEc:pen:papers:13-029

Contact details of provider:
Postal: 3718 Locust Walk, Philadelphia, PA 19104
Phone: 215-898-9992
Fax: 215-573-2378
Email:
Web page: http://economics.sas.upenn.edu/pier
More information through EDIRC

Related research

Keywords: Bayesian econometrics; price puzzle; persistent real effects of nominal shocks; imperfect common knowledge; public signal; heterogeneous beliefs;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  2. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-84, December.
  3. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, Elsevier, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.
  4. Frank Schorfheide & Marco Del Negro, 2007. "Forming Priors for DSGE Models (and How It Affects the Assessment of Nominal Rigidities)," 2007 Meeting Papers, Society for Economic Dynamics 283, Society for Economic Dynamics.
  5. Bianchi, Francesco & Melosi, Leonardo, 2014. "Constrained Discretion and Central Bank Transparency," CEPR Discussion Papers 9955, C.E.P.R. Discussion Papers.
  6. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
  7. Mathias Trabandt, 2007. "Sticky Information vs. Sticky Prices: A Horse Race in a DSGE Framework," Kiel Working Papers 1369, Kiel Institute for the World Economy.
  8. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, vol. 94(2), pages 91-98, May.
  9. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2010. "Business Cycle Dynamics under Rational Inattention," CEPR Discussion Papers 7691, C.E.P.R. Discussion Papers.
  10. Kristoffer Nimark, 2007. "Dynamic higher order expectations," Economics Working Papers 1118, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2011.
  11. N. Gregory Mankiw & Ricardo Reis, 2006. "Pervasive Stickiness," American Economic Review, American Economic Association, vol. 96(2), pages 164-169, May.
  12. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  13. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2007. "Optimal Sticky Prices under Rational Inattention," CEPR Discussion Papers 6243, C.E.P.R. Discussion Papers.
  14. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, Econometric Society, vol. 75(4), pages 1103-1142, 07.
  15. Baeriswyl, Romain & Cornand, Camille, 2010. "The signaling role of policy actions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(6), pages 682-695, September.
  16. Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(2), pages 267-301, March.
  17. Francesco Bianchi, 2010. "Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," Working Papers, Duke University, Department of Economics 10-39, Duke University, Department of Economics.
  18. Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers, Stanford Institute for Economic Policy Research 07-007, Stanford Institute for Economic Policy Research.
  19. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2005. "Signaling in a Global Game: Coordination and Policy Traps," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1400, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  20. Kristoffer Nimark, 2011. "Man-bites-dog business cycles," Economics Working Papers 1341, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2013.
  21. Olivier Coibion & Yuriy Gorodnichenko, 2011. "Why are target interest rate changes so persistent?," Working Papers, Department of Economics, College of William and Mary 106, Department of Economics, College of William and Mary.
  22. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  23. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
  24. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 546-88, August.
  25. Castelnuovo, Efrem & Surico, Paolo, 2009. "Monetary policy, inflation expectations and the price puzzle," Research Discussion Papers 30/2009, Bank of Finland.
  26. Leonardo Melosi, 2014. "Estimating Models with Dispersed Information," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(1), pages 1-31, January.
  27. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research, National Bank of Belgium 109, National Bank of Belgium.
  28. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
  29. Christian Matthes & Argia M. Sbordone & Timothy Cogley, 2011. "Optimal Disinflation Under Learning," 2011 Meeting Papers 74, Society for Economic Dynamics.
  30. Venky Venkateswaran & Christian Hellwig, 2009. "Setting The Right Prices for the Wrong Reasons," 2009 Meeting Papers, Society for Economic Dynamics 260, Society for Economic Dynamics.
  31. Mirko Wiederholt & Emanuel Moench & Bartosz Maćkowiak, 2009. "Sectoral Price Data and Models of Price Setting," 2009 Meeting Papers, Society for Economic Dynamics 666, Society for Economic Dynamics.
  32. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  33. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1415-1464, November.
  34. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
  35. Nimark, Kristoffer, 2008. "Dynamic pricing and imperfect common knowledge," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(2), pages 365-382, March.
  36. Luigi Paciello, 2009. "Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention," EIEF Working Papers Series 0916, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2011.
  37. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(7), pages 1385-1413, October.
  38. University of California & Giacomo Rondina, 2008. "Incomplete Information and Informative Pricing: Theory and Application," 2008 Meeting Papers 981, Society for Economic Dynamics.
  39. Mankiw, N Gregory & Reis, Ricardo, 2006. "Pervasive Stickiness (Expanded Version)," CEPR Discussion Papers 5521, C.E.P.R. Discussion Papers.
  40. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
  41. George-Marios Angeletos & Jennifer La'O, 2009. "Incomplete Information, Higher-Order Beliefs and Price Inertia," NBER Working Papers 15003, National Bureau of Economic Research, Inc.
  42. Leonardo Melosi & Francesco Bianchi, 2012. "Inflationary Sentiments and Monetary Policy Communcation," 2012 Meeting Papers, Society for Economic Dynamics 893, Society for Economic Dynamics.
  43. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  44. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  45. Kristoffer Nimark, 2009. "A low dimensional Kalman filter for systems with lagged observables," Economics Working Papers 1182, Department of Economics and Business, Universitat Pompeu Fabra.
  46. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  47. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(6), pages 1151-1166, September.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Signaling Effects of Monetary Policy
    by Christian Zimmermann in NEP-DGE blog on 2013-07-19 00:25:50
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Francesco Bianchi & Leonardo Melosi, 2013. "Modeling the Evolution of Expectations and Uncertainty in General Equilibrium," Working Papers, Duke University, Department of Economics 13-14, Duke University, Department of Economics.
  2. Francesco Bianchi & Leonardo Melosi, 2012. "Constrained Discretion and Central Bank Transparency," PIER Working Paper Archive 13-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Francesco Bianchi & Leonardo Melosi, 2013. "Dormant Shocks and Fiscal Virtue," NBER Chapters, in: NBER Macroeconomics Annual 2013, Volume 28, pages 1-46 National Bureau of Economic Research, Inc.
  4. Olivier Coibion & Yuriy Gorodnichenko, 2011. "Why Are Target Interest Rate Changes So Persistent?," NBER Working Papers 16707, National Bureau of Economic Research, Inc.
  5. Kinda Hachem & Jing Cynthia Wu, 2014. "Inflation Announcements and Social Dynamics," NBER Working Papers 20161, National Bureau of Economic Research, Inc.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pen:papers:13-029. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dolly Guarini).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.