Central Bank Policy Paths and Market Forward Rates: A Simple Model

Increasingly many central banks announce likely paths for future policy rates. Recent experience suggest that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations both in the model and in the data and show how the model can inform policy deliberations

Signaling Effects of Monetary Policy

We develop a DSGE model in which the policy rate signals the central bank.s view about macroeconomic developments to incompletely informed price setters. The model is estimated with likelihood methods on a U.S. data set including the Survey of Professional Forecasters as a measure of price setters.expectations. The signaling effects of monetary policy are found to be empirically important and dampen the effects of monetary disturbances on inflation. While the signaling effects enhance the Federal Reserve.s ability to stabilize the economy in the face of demand shocks, they play a small role in stabilizing the economy after technology shocks

Disagreement and Monetary Policy

Time-variation in disagreement about inflation expectations is a stylized fact in surveys, but little is known on how disagreement interacts with the efficacy of monetary policy. This paper fills this gap in providing theoretical predictions of monetary policy shocks for different levels of disagreement and testing these empirically. When disagreement is high, a dispersed information New Keynesian model predicts that a contractionary monetary policy shock leads to a short-run rise in inflation and inflation expectations, whereas both decline when disagreement is low. Estimating a smooth-transition model on U.S. data shows significantly different responses in inflation and inflation expectations consistent with theory