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Does the Federal Reserve possess an exploitable informational advantage?

  • Joe Peek
  • Eric S. Rosengren
  • Geoffrey M. B. Tootell

This paper provides evidence that the Federal Reserve has an informational advantage over the public that can be exploited to improve activist monetary policy. The informational advantage derives from the Fed?s role as a bank supervisor, and it is shown to be of sufficient duration to be effective in guiding activist monetary policy, even in simple rational expectations models. The informational superiority does not result from the Fed having earlier access to publicly released data about the financial condition of banks. Instead, this informational advantage is generated by confidential supervisory knowledge about troubled, non-publicly traded banks. As a result, this information can remain confidential for an extended period of time because these banks do not have an incentive to fully disclose publicly the extent of their financial troubles, and, since they are not publicly traded, are not required to do so. The improvement in forecasts using this confidential information is both statistically significant and economically important, providing a potential justification for activist monetary policy.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 99-8.

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Date of creation: 1999
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Handle: RePEc:fip:fedbwp:99-8
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  2. Geoffrey M. B. Tootell, 1991. "Regional economic conditions and the FOMC votes of district presidents," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 3-16.
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  8. Anil Kashyap & Jeremy C. Stein, 1993. "Monetary Policy and Bank Lending," NBER Working Papers 4317, National Bureau of Economic Research, Inc.
  9. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September.
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  14. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  15. Alex Cukierman, 1989. "Why does the Fed smooth interest rates?," Proceedings, Federal Reserve Bank of St. Louis, pages 111-157.
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  17. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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  19. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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  22. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is Bank Supervision Central to Central Banking?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 629-653.
  23. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
  24. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
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  26. Christina D. Romer & David H. Romer, 1996. "Federal Reserve Private Information and the Behavior of Interest Rates," NBER Working Papers 5692, National Bureau of Economic Research, Inc.
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