Changes in the Federal Reserve Communication Strategy: A Structural Investigation

This paper structurally investigates the changes in the Federal Reserve's communication strategy during the 1990s by analyzing anticipated and unanticipated disturbances to a Taylor rule. The anticipated monetary policy disturbances are identified by estimating a medium-scale dynamic stochastic general equilibrium model with the term structure of interest rates, using the U.S. data that includes bond yields. The estimation results show that the Fed made its future policy actions unanticipated for market participants until the mid-1990s, but thereafter, the Fed tended to coordinate market expectations about future policy actions. This finding suggests that the changes in the Fed's communication strategy are consistent with the rise of the academic views on central banking as management of expectations. The inclusion of bond yields in the data for estimation is indispensable to the finding because the yields contain crucial information on the expected future path of the federal funds rate. Moreover, it is demonstrated that the presence of bond yields data generates a substantial contribution of monetary policy disturbances to business cycles.