Working Paper: NBER ID: w16412
Authors: James D. Hamilton; Seth Pruitt; Scott Borger
Abstract: We introduce a novel method for estimating a monetary policy rule using macroeconomic news. We estimate directly the policy rule agents use to form their expectations by linking news' effects on forecasts of both economic conditions and monetary policy. Evidence between 1994 and 2007 indicates that the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. These response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.
Keywords: Monetary Policy; Market Expectations; Taylor Rule
JEL Codes: E44; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic news (E60) | market-perceived monetary policy rule (E52) |
| market-perceived monetary policy rule (1994-2007) (E52) | market's inflation response coefficient (E31) |
| market-perceived monetary policy rule (1994-2007) (E52) | market's output response (P42) |
| macroeconomic news (E60) | expectations about the Fed's actions (E52) |
| market's inflation response coefficient (E31) | perceived increase in monetary policy inertia (E49) |