Article thumbnail

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

By Fabio Milani and John Treadwell

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

OAI identifier:

Suggested articles

Citations

  1. (2011). Can News Be a Major Source of Aggregate Fluctuations?
  2. (2008). Central Bank Communication and Monetary Policy: a Survey of Theory and
  3. (2005). Central Bank Communication and Policy Effectiveness”,
  4. (2011). Changes in the Federal Reserve Communication Strategy”,
  5. (2009). Consumption Habits in a New Keynesian Business Cycle Model,”
  6. (1982). Does Anticipated Monetary Policy Matter? An Econometric Investigation,”
  7. (2008). Fiscal Foresight: Analytics and Econometrics”,
  8. (2003). Inflation Targeting Rules”,
  9. (2009). Learning and the Evolution of the Fed’s Inflation Target”, mimeo,
  10. (2001). Measuring Systematic Monetary Policy,” Federal Reserve Bank of St. Louis Review,
  11. (2010). Measuring the Impact of Fiscal Policy in the Face of Anticipation:
  12. (2002). Monetary Disturbances Matter For Business Fluctuations in the G-7,”
  13. (1999). Monetary Policy Shocks: What Have We Learned And To What End?,”
  14. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy,”
  15. (2000). Solving Linear Rational Expectations Models”,
  16. (2004). Specifying and Estimating New Keynesian Models with Instrument Rules and Optimal Monetary Policies,” Federal Reserve Bank of San Francisco Working Paper 17.
  17. (2006). Structural Factor-Augmented VARs (SFAVARs) and the Effects of Monetary Policy”,
  18. (2009). The Quantitative Importance of News Shocks
  19. (2005). What Are The Effects Of Monetary Policy On Output? Results From An Agnostic Identification Procedure,”
  20. (1998). What Do the VARs Mean? Measuring The Output Effects Of Monetary Policy,”

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.