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Do Federal Reserve communications help predict federal funds target rate decisions?

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  • Hayo, Bernd
  • Neuenkirch, Matthias

Abstract

We explain federal funds target rate decisions using macroeconomic variables and Federal Reserve communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 75 target rate decisions between 1998 and 2006. We find, first, that our communication indicators significantly explain target rate decisions and improve explanatory power in and out of sample. Second, speeches by members of the Board of Governors and regional presidents have a statistically significant and equal-sized effect, whereas the less-frequent monetary policy reports and congressional hearings are insignificant. Third, our findings are robust to variations in the specification, including changes in the communication strategy. Finally, our communication indicator based on Federal Reserve speeches performs better in explaining target rate decisions than do newswire reports of Fed communications.

Suggested Citation

  • Hayo, Bernd & Neuenkirch, Matthias, 2010. "Do Federal Reserve communications help predict federal funds target rate decisions?," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1014-1024, December.
  • Handle: RePEc:eee:jmacro:v:32:y:2010:i:4:p:1014-1024
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    More about this item

    Keywords

    Central bank communication Federal Reserve Bank Interest rate decision Monetary policy Federal funds target rate Taylor rule;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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