IDEAS home Printed from https://ideas.repec.org/p/fip/fedcwq/97469.html

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

Author

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.

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: https://doi.org/10.26509/frbc-wp-202332r
    File Function: Persistent Link
    Download Restriction: no
    File URL: https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/publications/working-papers/2025/wp2332r.pdf
    File Function: Full Text
    Download Restriction: no
    File URL: https://libkey.io/10.26509/frbc-wp-202332r?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Han, Zhao & Tan, Fei & Wu, Jieran, 2022. "Analytic policy function iteration," Journal of Economic Theory, Elsevier, vol. 200(C).
    2. 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.
    3. 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.
    4. 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.
    5. Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 863-904.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christopher S. Sutherland, 2020. "Forward Guidance and Expectation Formation: A Narrative Approach," Staff Working Papers 20-40, Bank of Canada.
    2. Andrew B. Martinez, 2025. "How do Macroeconomic Expectations React to Extreme Weather Shocks?," Working Papers 2025-001, The George Washington University, The Center for Economic Research.
    3. Christopher D. Cotton, 2022. "Looking Beyond the Fed: Do Central Banks Cause Information Effects?," Working Papers 22-21, Federal Reserve Bank of Boston.
    4. Juan Arismendi-Zambrano & Emmanuel Kypraios & Alessia Paccagnini, 2026. "Informativeness of the federal reserve chair communication’s sentiment on the monetary policy uncertainty," Annals of Operations Research, Springer, vol. 357(1), pages 633-677, February.
    5. Golez, Benjamin & Matthies, Ben, 2025. "Fed information effects: Evidence from the equity term structure," Journal of Financial Economics, Elsevier, vol. 165(C).
    6. Sylvérie Herbert & Paul Hubert & Mathias Lé, 2025. "When does Monetary Policy Matter? Policy Stance vs. Term Premium News 1," Sciences Po Economics Publications (main) hal-05481635, HAL.
    7. Andrade, Philippe & Gautier, Erwan & Mengus, Eric, 2023. "What matters in households’ inflation expectations?," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 50-68.
    8. Ricardo Nunes & Ali Ozdagli & Jenny Tang, 2022. "Interest Rate Surprises: A Tale of Two Shocks," Working Papers 22-2, Federal Reserve Bank of Boston.
    9. Ying, Shan & Sheen, Jeffrey & Gu, Xin & Wang, Ben Zhe, 2025. "Does monetary policy uncertainty moderate the transmission of policy shocks to government bond yields?," Journal of International Money and Finance, Elsevier, vol. 154(C).
    10. Christopher S Sutherland, 2022. "Forward guidance and expectation formation: A narrative approach," BIS Working Papers 1024, Bank for International Settlements.
    11. Michael D Bauer & Carolin E Pflueger & Adi Sunderam, 2024. "Perceptions About Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(4), pages 2227-2278.
    12. Coenen, Günter & Montes-Galdón, Carlos & Saint Guilhem, Arthur & Hutchinson, John & Motto, Roberto, 2022. "Rate forward guidance in an environment of large central bank balance sheets: a Eurosystem stock-taking assessment," Occasional Paper Series 290, European Central Bank.
    13. Jia, Chengcheng, 2023. "The informational effect of monetary policy and the case for policy commitment," European Economic Review, Elsevier, vol. 156(C).
    14. Christopher S. Sutherland, 2023. "Forward guidance and expectation formation: A narrative approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(2), pages 222-241, March.
    15. Assenmacher, Katrin & Glöckler, Gabriel & Holton, Sarah & Trautmann, Peter & Ioannou, Demosthenes & Mee, Simon & Alonso, Conception & Argiri, Eleni & Arigoni, Filippo & Bakk-Simon, Klára & Bergbauer, , 2021. "Clear, consistent and engaging: ECB monetary policy communication in a changing world," Occasional Paper Series 274, European Central Bank.
    16. Fernando Alvarez & Francesco Lippi & Juan Passadore, 2017. "Are State- and Time-Dependent Models Really Different?," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 379-457.
    17. Benigno, Pierpaolo & Paciello, Luigi, 2014. "Monetary policy, doubts and asset prices," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 85-98.
    18. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Paper 96.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    19. Mina Kim & Deokwoo Nam & Jian Wang & Jason J. Wu, 2013. "International trade price stickiness and exchange rate pass-through in micro data: a case study on U.S.–China trade," Globalization Institute Working Papers 135, Federal Reserve Bank of Dallas.
    20. Federico Di Pace & Matthias Hertweck, 2019. "Labor Market Frictions, Monetary Policy, and Durable Goods," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 274-304, April.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedcwq:97469. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: 4D Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbclus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.