Working Paper: CEPR ID: DP17574
Authors: Michael Bauer; Carolin Pflueger; Adi Sunderam
Abstract: We estimate perceptions about the Fed's monetary policy rule from micro data on professional forecasters. The perceived rule varies significantly over time, with important consequences for monetary policy and bond markets. Over the monetary policy cycle, easings are perceived to be quick and surprising, while tightenings are perceived to be gradual and data-dependent. Consistent with the idea that forecasters learn about the policy rule from policy decisions, the perceived monetary policy rule responds to high-frequency monetary policy surprises. Variation in the perceived rule impacts financial markets, explaining changes in the sensitivity of interest rates to macroeconomic announcements and affecting risk premia on long-term Treasury bonds. It also helps explain forecast errors for the future federal funds rate. We interpret these findings through the lens of a model with forecaster heterogeneity and learning from observed policy decisions.
Keywords: beliefs; monetary policy; forecasts
JEL Codes: E43; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perceived monetary policy rule (E52) | speed and nature of monetary policy adjustments (E52) |
| perceived monetary policy rule (E52) | response to high-frequency monetary policy surprises (E39) |
| high-frequency monetary policy surprises (E39) | perceived output gap weight (E23) |
| perceived output gap weight (E23) | subjective risk premium on the 11-year treasury bond (G12) |
| perceptions of the monetary policy rule (E52) | forecast errors for the future federal funds rate (E47) |