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The Yield Curve Slope and Monetary Policy Innovations

  • Gamber, Edward N.

    (Department of Economics and Business, Lafayette College)

  • Joutz, Frederick L.

    (Department of Economics, The George Washington University)

We separate changes of the federal funds rate into two components; one reflects the Fed's superior forecasts about the state of the economy and the other component reflects the Fed's reaction to the public's forecast about the state of the economy. Romer and Romer (2000) found that the Fed reveals information about inflation when it tightens monetary policy. Their research has implications for measuring monetary policy as well. When the Fed raises short-term interest rates it leads to some combination of increased inflationary expectations and an increased real rate. In this paper we estimate a structural VAR that allows us to separate out (identify) components of federal funds changes that are due to inflationary expectations (thus neutral) and that part which is contractionary. Our measure of monetary policy is the part of federal funds changes that exclude the Fed's revelation of its asymmetric information about future inflation.

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File URL: http://www.ihs.ac.at/publications/eco/es-171.pdf
File Function: First version, 2005
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Paper provided by Institute for Advanced Studies in its series Economics Series with number 171.

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Length: 35 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:ihs:ihsesp:171
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  1. Barth, Marvin J III & Ramey, Valerie A, 2000. "The Cost Channel of Monetary Transmissions," University of California at San Diego, Economics Working Paper Series qt7rm5q9sk, Department of Economics, UC San Diego.
  2. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  3. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 869-902, August.
  4. Leonall C. Andersen & Jerry L. Jordon, 1968. "Monetary and fiscal actions: a test of their relative importance in economic stabilization," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 11-23.
  5. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August.
  6. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  7. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
  8. John F. Boschen & Leonard O. Mills, 1991. "The effects of countercyclical monetary policy on money and interest rates: an evaluation of evidence from FOMC documents," Working Papers 91-20, Federal Reserve Bank of Philadelphia.
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