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Monetary policy and news shocks: are Taylor rules forward-looking?

Author

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  • Best Gabriela

    (California State University, Fullerton, CA, USA)

  • Kapinos Pavel

    (Division of Insurance and Research, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429, USA)

Abstract

This paper extends a standard New Keynesian model by introducing anticipated shocks to inflation, output, and interest rates, and by incorporating forward-looking, forecast-targeting Taylor rules. The latter aspect is parsimoniously modeled through the presence of an expected future interest rate term in the Taylor rule that recent literature has found to be economically and statistically important in a variety of settings without anticipated shocks. Using Bayesian econometric methods, we find that the presence of anticipated shocks improves the model’s fit to the US data but substantially decreases the weight on future macroeconomic variables in the forward-looking Taylor rule. Our results suggest that, although communicating its intentions regarding future monetary policy conduct, as modeled by anticipated monetary shocks, plays an important role for the Fed, responding to its expectations of future macroeconomic conditions does not. Furthermore, we conduct extensive robustness checks with respect to modeling the forward-looking specification of the Taylor rule that confirm our baseline results.

Suggested Citation

  • Best Gabriela & Kapinos Pavel, 2016. "Monetary policy and news shocks: are Taylor rules forward-looking?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(2), pages 335-360, June.
  • Handle: RePEc:bpj:bejmac:v:16:y:2016:i:2:p:335-360:n:3
    DOI: 10.1515/bejm-2014-0161
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    References listed on IDEAS

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    3. Ali, Syed Zahid & Anwar, Sajid, 2018. "Price puzzle in a small open New Keynesian model," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 29-42.
    4. Zhang, Yanfang & Nie, Rui & Shi, Xunpeng & Qian, Xiangyan & Wang, Ke, 2019. "Can energy-price regulations smooth price fluctuations? Evidence from China’s coal sector," Energy Policy, Elsevier, vol. 128(C), pages 125-135.
    5. Pavel Kapinos, 2018. "Monetary Policy News and Systemic Risk at the Zero Lower Bound," 2018 Meeting Papers 1052, Society for Economic Dynamics.

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