Asymmetric Information, Stock Returns and Monetary Policy: A Theoretical and Empirical Analysis

It is known that stock returns are affected by monetary policy. This paper theoretically and empirically investigates whether asymmetric information between the Federal Reserve and the public causes the relation between stock returns and monetary policy actions. The paper concludes that asymmetric information between the Federal Reserve and the public is one of the reasons of effects of monetary policy actions on stock returns. A Kalman filter algorithm is constructed to analyze the information and learning dynamics between the Federal Reserve and a representative investor. Stock prices react to monetary policy actions because monetary policy actions reveal the private information that the Fed has about future inflation and output. Investors update their expectations after observing the Fed's actions and that produces a change in stock returns. The findings of the model are empirically investigated using VAR and impulse responses verify the theoretical findingsAsymmetric Information, Monetary Policy, Stock Returns, Kalman Filter, Learning

A New Measure of Monetary Shocks: Derivation and Implications

Conventional measures of monetary policy, such as the federal funds rate, are surely influenced by forces other than monetary policy. More importantly, central banks adjust policy in response to a wide range of information about future economic developments. As a result, estimates of the effects of monetary policy derived using conventional measures will tend to be biased. To address this problem, we develop a new measure of monetary policy shocks in the United States for the period 1969 to 1996 that is relatively free of endogenous and anticipatory movements. The derivation of the new measure has two key elements. First, to address the problem of forward-looking behavior, we control for the Federal Reserve's forecasts of output and inflation prepared for scheduled FOMC meetings. We remove from our measure policy actions that are a systematic response to the Federal Reserve's anticipations of future developments. Second, to address the problem of endogeneity and to ensure that the forecasts capture the main information the Federal Reserve had at the times decisions were made, we consider only changes in the Federal Reserve's intentions for the federal funds rate around scheduled FOMC meetings. This series on intended changes is derived using information on the expected funds rate from the records of the Open Market Manager and information on intentions from the narrative records of FOMC meetings. The series covers the entire period for which forecasts are available, including times when the Federal Reserve was not exclusively targeting the funds rate. Estimates of the effects of monetary policy obtained using the new measure indicate that policy has large, relatively rapid, and statistically significant effects on both output and inflation. We find that the effects using the new measure are substantially stronger and quicker than those using prior measures. This suggests that previous measures of policy shocks are significantly contaminated by forward-looking Federal Reserve behavior and endogeneity.

On the information content of asymmetric FOMC policy statements: evidence from a Taylor-rule perspective

Over the past two decades, the FOMC has included in its policy decisions a statement of bias toward subsequent tightening or easing of policy. This paper examines the predictive content of these statements in a Taylor-rule setting, finding that they convey information that is useful for forecasting changes in the federal funds rate target, even after controlling for policy responses to inflation and the output gap. Moreover, the evidence suggests that this asymmetry can be represented in terms of shifts to the parameters of the Taylor-rule equation, indicating a greater or lesser degree of responsiveness to incoming information about inflation and output.Monetary policy ; Federal Open Market Committee

Fostering Equitable Foreclosure Recovery

This report provides essential information to inform policy discussions about foreclosure recovery. It presents information about the foreclosure crisis and its consequences, describes the federal program created to help communities recover from the impacts of foreclosures, shares case studies of foreclosure recovery efforts in three regions in the Northwest -- Minneapolis-St. Paul, Portland, and Seattle -- and suggests policy recommendations for ensuring equitable recovery

Federal Reserve Behavior Since 1980: A Financial Markets Perspective

The financial market's understanding of Federal Reserve behavior is used to examine recent changes in monetary policy. Changes in the level of interest rats in response to specific types of economic information are primarily considered. Differences in the volatility of interest rates across period provide additional evidence on changes in monetary policy regimes. The results indicate that monetary policy changed several times since 1980 with respect to either the Federal Reserve's targets, its desire to achieve its targets, or its operating procedures. The different regimes correspond to Federal Reserve statements about changes in policy. In this context, then, the evidence suggests that policy was credible.

The monetary policy innovation paradox in VARs: a "discrete" explanation

Monetary policy shocks derived from VARs often suggest that monetary policymakers regularly react to an unexpected increase that they induced in the federal funds rate with additional increases. This puzzling pattern can be called the “policy innovation paradox” because there is no obvious explanation for such a pattern. This article shows that the policy innovation paradox is most likely an artifact of failing to account for the discreteness of changes that policymakers make to the target federal funds rate. Mis-specified VARs that fail to account for discrete target changes imply the policy innovation paradox, whereas a model that uses information from discrete policy changes does not.Monetary policy ; Federal funds rate ; Vector autoregression

The Yield Curve Slope and Monetary Policy Innovations

We separate changes of the federal funds rate into two components; one reflects the Fed's superior forecasts about the state of the economy and the other component reflects the Fed's reaction to the public's forecast about the state of the economy. Romer and Romer (2000) found that the Fed reveals information about inflation when it tightens monetary policy. Their research has implications for measuring monetary policy as well. When the Fed raises short-term interest rates it leads to some combination of increased inflationary expectations and an increased real rate. In this paper we estimate a structural VAR that allows us to separate out (identify) components of federal funds changes that are due to inflationary expectations (thus neutral) and that part which is contractionary. Our measure of monetary policy is the part of federal funds changes that exclude the Fed's revelation of its asymmetric information about future inflation.Monetary policy, Yield curve, Inflation, Price puzzle

Abstinence Only vs. Comprehensive Sex Education: What are the Arguments? What is the Evidence?

Responding to the continuing health threats of HIV, STIs and unplanned pregnancy among young people, the widely respected Institute of Medicine of the National Academy of Sciences recently recommended eliminating congressional, federal, state and local "requirements that public funds be used for abstinence-only education." And surveys consistently show that the public wants schools to deliver strong abstinence messages alongside information about self-protection for young people who find themselves in sexual situations. The vast majority of parents support sex education in the schools, including the provision of information about contraceptive and condom use.Unfortunately, federal policy is grossly out of step with the wishes of most parents and students, as well as the scientific research. Since the early 1980s, Congress has devoted significant resources to abstinence-only programming. Partly as a result of federal policy and funding changes, public schools are increasingly supporting abstinence-only curricula that are less likely to include information about birth control, STD prevention and sexual orientation. The evidence tells us that these trends represent a dangerous disservice to America's younger generation