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The Information Effect of Monetary Policy: Self-Defeating or Optimal?

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  • Wesley Janson
  • Chengcheng Jia

Abstract

As the Federal Reserve has become more transparent about its decisions on the federal funds target rate, the general public has begun to regard the rate as not only a benchmark interest rate, but also as a signal about the state of the economy. However, the specific information considered by the public to be revealed is not clearly understood. We investigate this question and find that the information revealed by monetary policy decisions is regarding future output growth, not inflation, and that such an information effect is theoretically optimal and does not make interest-rate policies self-defeating.

Suggested Citation

  • Wesley Janson & Chengcheng Jia, 2020. "The Information Effect of Monetary Policy: Self-Defeating or Optimal?," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2020(15), pages 1-5, July.
    • Handle: RePEc:fip:fedcec:88276
    DOI: 10.26509/frbc-ec-202015
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    References listed on IDEAS

    as
    1. Chengcheng Jia, 2019. "The Informational Effect of Monetary Policy and the Case for Policy Commitment," Working Papers 19-07R, Federal Reserve Bank of Cleveland, revised 09 May 2022.
    2. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
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    Cited by:

    1. Calvin He, 2021. "Monetary Policy, Equity Markets and the Information Effect," RBA Research Discussion Papers rdp2021-04, Reserve Bank of Australia.

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