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Data Revisions, Gradualism, and US Inflation Pressure in Real Time

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  • Pierre L. Siklos

    ()
    (Department of Economics and Viessman Research Centre, Wilfrid Laurier University)

  • Diana N. Weymark

    ()
    (Department of Economics, Vanderbilt University)

Abstract

Uncertainties associated with the informational content of real-time data and the impact of policy initiatives on expectations have been offered as rationales for gradualism in monetary policy. Our objective is to assess these potential explanations quantitatively. Focusing on inflation as the key variable of interest to central banks, we construct indices of inflation pressure to characterize the state of the economy before and after the implementation of monetary policy. Using six vintages of US data, we analyze changes in the information content of economic data across revisions and the importance of expectations in determining the impact of monetary policy. We find that monetary policy affects inflation pressure and realized inflation primarily through its impact on expectations. We also find that while the Fed manages to influence expectations almost two thirds of the time the impact can be quantitatively small at times. One policy implication is that policy communication perhaps plays an even more crucial role for a gradualist central bank than one might think a priori.

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File URL: http://www.accessecon.com/pubs/VUECON/vu11-w10.pdf
File Function: Revised version, September 2011
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 1110.

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Date of creation: Sep 2011
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Handle: RePEc:van:wpaper:1110

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Inflation pressure; counterfactuals; real time data; gradualism; monetary policy;

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  1. Lanne , Markku, 2002. "Nonlinear dynamics of interest rate and inflation," Research Discussion Papers, Bank of Finland 21/2002, Bank of Finland.
  2. Söderlind, Paul & Söderström, Ulf & Vredin, Anders, 2003. "Taylor Rules and the Predictability of Interest Rates," Working Paper Series 147, Sveriges Riksbank (Central Bank of Sweden).
  3. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1161-1187, September.
  4. Dean Croushore & Charles L. Evans, 2003. "Data revisions and the identification of monetary policy shocks," Working Papers 03-1, Federal Reserve Bank of Philadelphia.
  5. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(4), pages 1163-1212, May.
  6. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers, C.V. Starr Center for Applied Economics, New York University 99-13, C.V. Starr Center for Applied Economics, New York University.
  7. Diana N. Weymark & Mototsugu Shintani, 2004. "Measuring Inflation Pressure and Monetary Policy Response: A General Approach Applied to US Data 1966 - 2001," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0424, Vanderbilt University Department of Economics.
  8. John B. Taylor & John C. Williams, 2010. "Simple and robust rules for monetary policy," Working Paper Series, Federal Reserve Bank of San Francisco 2010-10, Federal Reserve Bank of San Francisco.
  9. Pierre Siklos & Martin Bohl, 2009. "Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule," Open Economies Review, Springer, Springer, vol. 20(1), pages 39-59, February.
  10. Weymark, Diana N, 1998. "A General Approach to Measuring Exchange Market Pressure," Oxford Economic Papers, Oxford University Press, vol. 50(1), pages 106-21, January.
  11. Siklos,Pierre L., 2002. "The Changing Face of Central Banking," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521780254.
  12. Jondeau E. & Le Bihan H. & Galles C., 2004. "Assessing Generalized Method-of-Moments Estimates of the Federal Reserve Reaction Function," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 22, pages 225-239, April.
  13. Dean Croushore, 2008. "Revisions to PCE inflation measures: implications for monetary policy," Working Papers 08-8, Federal Reserve Bank of Philadelphia.
  14. Weymark, Diana N., 1995. "Estimating exchange market pressure and the degree of exchange market intervention for Canada," Journal of International Economics, Elsevier, Elsevier, vol. 39(3-4), pages 273-295, November.
  15. Kala Krishna & Tor Winston, 1998. "A New Model of Quality," NBER Working Papers 6580, National Bureau of Economic Research, Inc.
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