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Central Bank information and the effects of monetary shocks

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  • Paul Hubert

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank's and private agents' information sets affect private agents' interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England's macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents' information processing, and therefore changes their response to policy decisions.

Suggested Citation

  • Paul Hubert, 2017. "Central Bank information and the effects of monetary shocks," SciencePo Working papers Main hal-03471781, HAL.
    • Handle: RePEc:hal:spmain:hal-03471781
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03471781
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    File URL: https://hal-sciencespo.archives-ouvertes.fr/hal-03471781/document
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    References listed on IDEAS

    as
    1. Jean-Sébastien Fontaine & René Garcia, 2012. "Bond Liquidity Premia," The Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1207-1254.
    2. Michael Joyce & Peter Lildholdt & Steffen Sorensen, 2009. "Extracting inflation expectations and inflation risk premia from the term structure: a joint model of the UK nominal and real yield curves," Bank of England working papers 360, Bank of England.
    3. Grace Xing Hu & Jun Pan & Jiang Wang, 2013. "Noise as Information for Illiquidity," Journal of Finance, American Finance Association, vol. 68(6), pages 2341-2382, December.
    4. Joyce, Michael A.S. & Lildholdt, Peter & Sorensen, Steffen, 2010. "Extracting inflation expectations and inflation risk premia from the term structure: A joint model of the UK nominal and real yield curves," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 281-294, February.
    5. Long Chen & David A. Lesmond & Jason Wei, 2007. "Corporate Yield Spreads and Bond Liquidity," Journal of Finance, American Finance Association, vol. 62(1), pages 119-149, February.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Paul Hubert & Giovanni Ricco, 2018. "Imperfect Information in Macroeconomics," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(3), pages 181-196.
    2. repec:spo:wpmain:info:hdl:2441/7rrg4irjh79549mkjh27en0pos is not listed on IDEAS
    3. Mariusz Prochniak & Magdalena Szyszko, 2019. "The similarity of European central banks in terms of transparency and effectiveness," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 14(3), pages 385-404, September.
    4. repec:hal:spmain:info:hdl:2441/7rrg4irjh79549mkjh27en0pos is not listed on IDEAS
    5. Jeffrey R. Campbell & Thomas B. King & Anna Orlik & Rebecca Zarutskie, 2020. "Issues Regarding the Use of the Policy Rate Tool," Finance and Economics Discussion Series 2020-070, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Monetary policy; Information processing; Signal extraction; Market based inflation expectations; Central bank projections; Real time forecasts;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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