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Estimating the Market-Perceived Monetary Policy Rule

  • James D. Hamilton
  • Seth Pruitt
  • Scott Borger

We introduce a novel method for estimating a monetary policy rule using macroeconomic news. We estimate directly the policy rule agents use to form their expectations by linking news' effects on forecasts of both economic conditions and monetary policy. Evidence between 1994 and 2007 indicates that the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. These response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.

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File URL: http://www.nber.org/papers/w16412.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16412.

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Date of creation: Sep 2010
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Publication status: published as James D. Hamilton & Seth Pruitt & Scott Borger, 2011. "Estimating the Market-Perceived Monetary Policy Rule," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 1-28, July.
Handle: RePEc:nbr:nberwo:16412
Note: ME
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