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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

Related research

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

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  1. Siklos,Pierre L., 2006. "The Changing Face of Central Banking," Cambridge Books, Cambridge University Press, number 9780521034494, December.
  2. 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 0424, Vanderbilt University Department of Economics.
  3. Dean Croushore & Charles L. Evans, 2000. "Data revisions and the identification of monetary policy shocks," Working Paper Series WP-00-26, Federal Reserve Bank of Chicago.
  4. Markku Lanne, 2004. "Nonlinear dynamics of interest rate and inflation," Macroeconomics 0405014, EconWPA.
  5. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  6. 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, vol. 22, pages 225-239, April.
  7. John B. Taylor & John C. Williams, 2010. "Simple and robust rules for monetary policy," Working Paper Series 2010-10, Federal Reserve Bank of San Francisco.
  8. Andrew Ang & Geert Bekaert & Min Wei, 2006. "Do macro variables, asset markets, or surveys forecast inflation better?," Finance and Economics Discussion Series 2006-15, Board of Governors of the Federal Reserve System (U.S.).
  9. Weymark, Diana N., 1995. "Estimating exchange market pressure and the degree of exchange market intervention for Canada," Journal of International Economics, Elsevier, vol. 39(3-4), pages 273-295, November.
  10. Söderlind, Paul & Söderström, Ulf & Vredin, Anders, 2003. "Taylor Rules and the Predictability of Interest Rates," CEPR Discussion Papers 3934, C.E.P.R. Discussion Papers.
  11. 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, vol. 20(1), pages 39-59, February.
  12. 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.
  13. Dean Croushore, 2008. "Revisions to PCE inflation measures: implications for monetary policy," Working Papers 08-8, Federal Reserve Bank of Philadelphia.
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