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

  • Fabio Milani

    ()

    (Department of Economics, University of California-Irvine)

  • John Treadwell

    ()

    (Department of Economics, University of California-Irvine)

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.

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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2010-11/milani-9.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 101109.

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Length: 27 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:irv:wpaper:101109
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  1. Oscar Jorda & Kevin Hoover, 2003. "Measuring Systematic Monetary Policy," Working Papers 05, University of California, Davis, Department of Economics.
  2. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
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  12. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
  13. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
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  18. Michael Woodford, 2005. "Central Bank Communication and Policy Effectiveness," NBER Working Papers 11898, National Bureau of Economic Research, Inc.
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  25. repec:pri:cepsud:161blinder is not listed on IDEAS
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