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Term Structure, Forecast Revision, and the Signaling Channel of Monetary Policy

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  • Donghai Zhang

Abstract

Monetary policy shocks affect interest rates at long horizons (10 years or more). Furthermore, the private sectorâs real GDP forecasts are revised upward in response to a monetary tightening. These facts challenge the prevailing theories in academic and policy circles. In this paper, I propose a micro-founded model to rationalize those facts, based on the signaling channel of monetary policy. I consider a framework where the central bank has private information about future economic conditions. Agents update their beliefs according to Bayes’ theorem. Policy actions play a signaling role, and may therefore rationalize the above empirical findings.

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  • Donghai Zhang, 2022. "Term Structure, Forecast Revision, and the Signaling Channel of Monetary Policy," Journal of the European Economic Association, European Economic Association, vol. 20(4), pages 1522-1553.
    • Handle: RePEc:oup:jeurec:v:20:y:2022:i:4:p:1522-1553.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvac008
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