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Asymmetric Information, Two-Way Learning, and the Fed Information Effect

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Abstract

How important is the information effect of monetary policy? We first show analytically that the reduced-form method of regressing forecast revisions on monetary policy surprises leads to a biased estimation, due to the correlation between monetary policy surprises and the unobserved shocks. We then develop a New Keynesian model in which asymmetric information originates from a two-way learning mechanism: the central bank learns from lagged aggregate inflation and output, and firms learn from individual marginal costs and the interest rate. We calibrate our model parameters to match macroeconomic dynamics in the US and the forecast accuracy of the Federal Reserve and professional forecasters. Our calibrated model shows that the information effect reduces the output gaps caused by demand shocks and noise shocks, but may lead to a temporary rise in inflation after a contractionary monetary policy shock.

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  • Zhao Han & Chengcheng Jia, 2023. "Asymmetric Information, Two-Way Learning, and the Fed Information Effect," Working Papers 23-32R, Federal Reserve Bank of Cleveland, revised 02 Oct 2025.
    • Handle: RePEc:fip:fedcwq:97469
    DOI: 10.26509/frbc-wp-202332r
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    References listed on IDEAS

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    1. Han, Zhao & Tan, Fei & Wu, Jieran, 2022. "Analytic policy function iteration," Journal of Economic Theory, Elsevier, vol. 200(C).
    2. Kurt G. Lunsford, 2020. "Policy Language and Information Effects in the Early Days of Federal Reserve Forward Guidance," American Economic Review, American Economic Association, vol. 110(9), pages 2899-2934, September.
    3. Philippe Andrade & Gaetano Gaballo & Eric Mengus & Benoît Mojon, 2019. "Forward Guidance and Heterogeneous Beliefs," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 1-29, July.
    4. Alexandre N. Kohlhas, 2022. "Learning by Sharing: Monetary Policy and Common Knowledge," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 324-364, July.
    5. Michael D. Bauer & Eric T. Swanson, 2023. "An Alternative Explanation for the "Fed Information Effect"," American Economic Review, American Economic Association, vol. 113(3), pages 664-700, March.
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    Cited by:

    1. Kurov, Alexander & Olson, Eric & Wolfe, Marketa Halova, 2024. "Have the causal effects between equities, oil prices, and monetary policy changed over time?," Journal of Commodity Markets, Elsevier, vol. 36(C).

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    Keywords

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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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