Working Paper: NBER ID: w30480
Authors: Michael D. 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: monetary policy; forecasters; bond markets; policy rule
JEL Codes: E03; E4; E42; E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| perceived monetary policy rules vary significantly over the monetary policy cycle (E61) | perceived coefficient on the output gap (t) during easing cycles is low (E32) |
| perceived monetary policy rules vary significantly over the monetary policy cycle (E61) | perceived coefficient on the output gap (t) during tightening cycles is high (E32) |
| slope of the yield curve is flat or downward-sloping (E43) | perceived coefficient on the output gap (t) is low (E23) |
| high-frequency monetary policy surprises (E39) | forecasters adjust their beliefs about the policy rule (C53) |
| positive monetary policy surprise in a strong economy (E60) | increase in the perceived weight on the output gap (E19) |
| positive monetary policy surprise in a weak economy (E60) | decrease in the perceived weight on the output gap (E39) |
| one-standard deviation increase in the perceived output gap weight (t) (F62) | 11 percentage point decline in the subjective risk premium on the 11-year treasury bond (E43) |
| perceived monetary policy rule (E52) | understanding market reactions to macroeconomic news (E60) |
| perceived monetary policy rule (E52) | explaining forecast errors for the federal funds rate (E47) |