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What Does Anticipated Monetary Policy Do?

Stefania D'Amico and Thomas King

No WP-2015-10, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Forward rate guidance, which has been used with increasing regularity by monetary policymakers, relies on the manipulation of expectations of future short-term interest rates. We identify shocks to these expectations at short and long horizons since the early 1980s and examine their effects on contemporaneous macroeconomic outcomes. Our identification uses sign restrictions on survey forecasts incorporated in a structural VAR model to isolate expected deviations from the monetary policy rule. We find that expectations of future policy easing that materialize over the subsequent four quarters — similar to those generated by credible forward guidance — have immediate and persistent stimulative effects on output, inflation and employment. The effects are larger than those produced by an identical shift in the policy path that is not anticipated. Our results are broadly consistent with the mechanism underlying forward guidance in New Keynesian models, but they suggest that those models overstate the persistence of the inflation response. Further, we find that changes in short-rate expectations farther in the future have weaker macroeconomic effects, the opposite of what most New Keynesian models predict.

Keywords: Monetary policy; Keynesian models (search for similar items in EconPapers)
JEL-codes: E12 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2015-11-10
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