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The Effects of Monetary Policy "News" and "Surprises"

Author

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  • Fabio Milani

    () (Department of Economics, University of California-Irvine)

  • John Treadwell

    () (Department of Economics, University of California-Irvine)

Abstract

There is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks. The shocks that are investigated, however, almost exclusively represent unanticipated changes in policy, which surprise the private sector and which are typically found to have a delayed and sluggish effect on output. In this paper, we estimate a New Keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks. The paper shows that the conventional estimates confound two distinct effects on output: an effect due to unanticipated or ìsurpriseî shocks, which is smaller and more short-lived than the response usually obtained in the literature, and a large, delayed, and persistent effect due to anticipated policy shocks or "news." News shocks play a larger role in influencing the business cycle than unanticipated policy shocks, although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited.

Suggested Citation

  • Fabio Milani & John Treadwell, 2011. "The Effects of Monetary Policy "News" and "Surprises"," Working Papers 101109, University of California-Irvine, Department of Economics.
  • Handle: RePEc:irv:wpaper:101109
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    File URL: https://www.economics.uci.edu/files/docs/workingpapers/2010-11/milani-9.pdf
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    References listed on IDEAS

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    1. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, vol. 80(6), pages 2733-2764, November.
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    Cited by:

    1. Lambertini, Luisa & Mendicino, Caterina & Teresa Punzi, Maria, 2013. "Leaning against boom–bust cycles in credit and housing prices," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1500-1522.
    2. Caterina Mendicino & Sandra Gomes, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
    3. Negro, Marco Del & Schorfheide, Frank, 2013. "DSGE Model-Based Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.),Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 57-140, Elsevier.
    4. Badarinza, Cristian & Margaritov, Emil, 2011. "News and policy foresight in a macro-finance model of the US," Working Paper Series 1313, European Central Bank.

    More about this item

    Keywords

    Anticipated and unanticipated monetary policy shocks; News shocks; New Keynesian model with news shocks; Effects of monetary policy onoutput;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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