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Using private forecasts to estimate the effects of monetary policy

  • Thapar, Aditi

I develop a methodology that uses the forecasts of market participants and of policy makers to estimate the effects of monetary policy on output and inflation. My approach has advantages over the standard practice of fitting a vector autoregression to the data. I apply my methodology to data on output, interest rates and prices. I find that, even using the Federal Reserve Board's Greenbook forecasts to control for the policy maker's information set, prices rise initially in response to a monetary contraction. This finding undermines the standard justification for including an index of commodity prices in VARs.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 4 (May)
Pages: 806-824

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Handle: RePEc:eee:moneco:v:55:y:2008:i:4:p:806-824
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Capistrán, Carlos, 2008. "Bias in Federal Reserve inflation forecasts: Is the Federal Reserve irrational or just cautious?," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1415-1427, November.
  2. John H. Cochrane & Monika Piazzesi, 2002. "The Fed and Interest Rates: A High-Frequency Identification," NBER Working Papers 8839, National Bureau of Economic Research, Inc.
  3. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  4. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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  7. Hess Chung & Troy Davig & Eric M. Leeper, 2007. "Monetary and Fiscal Policy Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 809-842, 06.
  8. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  9. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  10. Jon Faust & Eric Swanson & and Jonathan H. Wright, 2002. "Identifying vars based on high frequency futures data," International Finance Discussion Papers 720, Board of Governors of the Federal Reserve System (U.S.).
  11. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  12. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," NBER Working Papers 10220, National Bureau of Economic Research, Inc.
  13. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  14. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting 'M' back in Monetary Policy," NBER Working Papers 9552, National Bureau of Economic Research, Inc.
  15. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  17. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  18. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
  19. Giordani, Paolo, 2001. "An Alternative Explanation of the Price Puzzle," Working Paper Series 125, Sveriges Riksbank (Central Bank of Sweden).
  20. Cochrane, John H., 1994. "Shocks," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 295-364, December.
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