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Signaling Effects of Monetary Policy

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  • 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.

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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.

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

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

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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.
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Cited by:
  1. Francesco Bianchi & Leonardo Melosi, 2013. "Constrained Discretion and Central Bank Transparency," Working Papers 13-13, Duke University, Department of Economics.
  2. Francesco Bianchi & Leonardo Melosi, 2013. "Dormant Shocks and Fiscal Virtue," Working Papers 13-12, Duke University, Department of Economics.
  3. Leonardo Melosi, 2013. "Modeling the Evolution of Expectations and Uncertainty in General Equilibrium," 2013 Meeting Papers 67, Society for Economic Dynamics.
  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.

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