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Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?

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Listed:
  • Faust Jon

    () (Federal Reserve Board)

  • Swanson Eric T

    () (Federal Reserve Board)

  • Wright Jonathan H

    () (Federal Reserve Board)

Abstract

A number of recent papers have hypothesized that the Federal Reserve possesses information about the course of inflation and output that is unknown to the private sector, and that policy actions by the Federal Reserve convey some of this superior information. We conduct two tests of this hypothesis: 1) could monetary policy surprises be used to improve the private sector's ex ante forecasts of subsequent macroeconomic statistical releases, and 2) does the private sector revise its forecasts of macroeconomic statistical releases in response to these monetary policy surprises? We find little evidence that Federal Reserve policy surprises convey superior information about the state of the economy: they could not systematically be used to improve forecasts of statistical releases and forecasts are not systematically revised in response to policy surprises. One possible exception to this pattern is Industrial Production, a statistic that the Federal Reserve produces.

Suggested Citation

  • Faust Jon & Swanson Eric T & Wright Jonathan H, 2004. "Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-31, October.
  • Handle: RePEc:bpj:bejmac:v:contributions.4:y:2004:i:1:n:10
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    References listed on IDEAS

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    1. Casey B. Mulligan & Xavier Sala-i-Martin, 1993. "Transitional Dynamics in Two-Sector Models of Endogenous Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 739-773.
    2. Benhabib Jess & Perli Roberto, 1994. "Uniqueness and Indeterminacy: On the Dynamics of Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 63(1), pages 113-142, June.
    3. Caballe, Jordi & Santos, Manuel S, 1993. "On Endogenous Growth with Physical and Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1042-1067, December.
    4. Xie Danyang, 1994. "Divergence in Economic Performance: Transitional Dynamics with Multiple Equilibria," Journal of Economic Theory, Elsevier, vol. 63(1), pages 97-112, June.
    5. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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