The market-perceived monetary policy rule

Scott Borger (), James Hamilton and Seth Pruitt ()

No 982, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We introduce a novel method for estimating a monetary policy rule using macroeconomic news. Market forecasts of both economic conditions and monetary policy are affected by news, and our estimation links the two effects. This enables us to estimate directly the policy rule agents use to form their expectations, and in so doing flexibly capture the particular dynamics of policy response. We find evidence that between 1994 and 2007 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. In a standard model we show that output smoothing caused by a larger inflation response magnitude is offset by the more measured pace of response. Our response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.

Keywords: Monetary policy - United States; Economic forecasting - United States (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:982

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