Working Paper: NBER ID: w19260
Authors: Emi Nakamura; J. N. Steinsson
Abstract: We present estimates of monetary non-neutrality based on evidence from high-frequency responses of real interest rates, expected inflation, and expected output growth. Our identifying assumption is that unexpected changes in interest rates in a 30-minute window surrounding scheduled Federal Reserve announcements arise from news about monetary policy. In response to an interest rate hike, nominal and real interest rates increase roughly one-for-one, several years out into the term structure, while the response of expected inflation is small. At the same time, forecasts about output growth also increase—the opposite of what standard models imply about a monetary tightening. To explain these facts, we build a model in which Fed announcements affect beliefs not only about monetary policy but also about other economic fundamentals. Our model implies that these information effects play an important role in the overall causal effect of monetary policy shocks on output.
Keywords: Monetary Policy; High-Frequency Identification; Interest Rates; Expected Inflation; Output Growth
JEL Codes: E30; E40; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected interest rate changes during FOMC announcements (E43) | increase in nominal and real interest rates (E43) |
| unexpected interest rate changes during FOMC announcements (E43) | small response of expected inflation (E31) |
| monetary tightening (E52) | increase in forecasts of output growth (E27) |
| FOMC announcements (E52) | influence on monetary policy expectations (E52) |
| FOMC announcements (E52) | influence on private sector beliefs about economic fundamentals (E69) |
| FOMC announcements (E52) | effects on beliefs about the natural rate of interest (E43) |
| monetary policy shocks (E39) | substantial effects on output growth expectations (F62) |
| FOMC announcements (E52) | influence on economic activity (E20) |
| changes in expectations about the natural rate of interest (E43) | response of real interest rates to monetary policy announcements (E43) |