Decomposing the Effects of Monetary Policy Using an External Instruments SVAR

We study the effects of monetary policy on economic activity separately identifying the effects of a conventional change in the fed funds rate from the policy of forward guidance. We use a structural VAR identified using external instruments from futures market data. The response of output to a fed funds rate shock is found to be consistent with typical monetary VAR analyses. However, the effect of a forward guidance shock that increases long-term interest rates has an expansionary effect on output. This counterintuitive response is shown to be tied to the asymmetric information between the Federal Reserve and the public

Decomposing the Effects of Monetary Policy Using an External Instruments SVAR

We study the effects of monetary policy on economic activity separately identifying the effects of a conventional change in the fed funds rate from the policy of forward guidance. We use a structural VAR identified using external instruments from futures market data. The response of output to a fed funds rate shock is found to be consistent with typical monetary VAR analyses. However, the effect of a forward guidance shock that increases long-term interest rates has an expansionary effect on output. This counterintuitive response is shown to be tied to the asymmetric information between the Federal Reserve and the public

What are the odds? option-based forecasts of FOMC target changes

This article uses probability forecasts derived from options to assess evolving market uncertainty about Federal Reserve monetary policy actions in a variety of recent events and episodes. Options on federal funds futures contracts reveal a complete probability density function over possible Federal Reserve target rates, thus augmenting the expectations provided by federal funds futures contracts. Option-based forecasts are most useful when more than two federal funds target outcomes are plausible at an upcoming policy meeting.Federal Open Market Committee ; Forecasting ; Monetary policy

Federal Reserve Private Information and the Stock Market

We study the response of stock prices to monetary policy, distinguishing the effects of exogenous policy actions from ``Delphic" actions that reveal the Federal Reserve's macroeconomic forecasts. To decompose composite monetary policy surprises into these separate components, we exploit differences in central bank and private sector forecasts to construct a measure of Federal Reserve private information. Contractionary monetary policy shocks of either type cause a fall in stock prices with exogenous shocks having a larger negative effect. However there is an important asymmetry; when FOMC meetings are unscheduled or when the fed funds rate reverses direction, stock prices actually rise in response to a contractionary Delphic shock

Federal Reserve Private Information and the Stock Market

We study the response of stock prices to monetary policy, distinguishing the effects of exogenous policy actions from ``Delphic" actions that reveal the Federal Reserve's macroeconomic forecasts. To decompose composite monetary policy surprises into these separate components, we exploit differences in central bank and private sector forecasts to construct a measure of Federal Reserve private information. Contractionary monetary policy shocks of either type cause a fall in stock prices with exogenous shocks having a larger negative effect. However there is an important asymmetry; when FOMC meetings are unscheduled or when the fed funds rate reverses direction, stock prices actually rise in response to a contractionary Delphic shock

Federal Reserve Credibility and the Term Structure of Interest Rates

In this paper we show how the degree of central bank credibility influences the level, slope and curvature of the term structure of interest rates. In an estimated structural model, we find that historical yield curve data are best matched by the Federal Reserve conducting policy in a loose commitment framework, rather than the commonly used discretion and full commitment assumptions. The structural impulse responses indicate that the past history of realized shocks play a crucial role in determining the dynamic effects of monetary policy on the yield curve. Finally, the regime-switching framework allows us to estimate likely re-optimization episodes which are found to impact the middle of the yield curve more than the short and long end

Essays in monetary policy

My thesis considers three issues related to monetary policy. The first chapter is an empirical investigation into the changes in the weight that the Federal Reserve has put on inflation relative to output. The second chapter considers the theoretical implications of globalization on inflation and monetary policy specifically focusing on the foreign competition channel. Finally, the third chapter estimates a level of credibility for the Federal Reserv

Federal Reserve Credibility and the Term Structure of Interest Rates

Parallel Sessions D: Monetary Polic

Market-based monetary policy uncertainty

Uncertainty about future policy rates plays a crucial role for the transmission of monetary policy to financial markets. We demonstrate this using event studies of FOMC announcements and a new model-free uncertainty measure based on derivatives. Over the ‘FOMC uncertainty cycle’ announcements systematically resolve uncertainty, which then gradually ramps up again. Changes in monetary policy uncertainty around FOMC announcements—often due to forward guidance—have pronounced effects on asset prices that are distinct from the effects of conventional policy surprises. The level of uncertainty determines the magnitude of financial market reactions to surprises about the path of policy rates