Working Paper: NBER ID: w5692
Authors: Christina D. Romer; David H. Romer
Abstract: Many authors argue that asymmetric information between the Federal Reserve and the public is important to the conduct and the effects of monetary policy. This paper tests for the existence of such asymmetric information by examining Federal Reserve and commercial inflation forecasts. We demonstrate that the Federal Reserve has considerable information about inflation beyond what is known to commercial forecasters. We also provide evidence that monetary policy actions provide signals of the Federal Reserve's private information and that commercial forecasters modify their forecasts in response to those signals. These findings may explain why long-term interest rates typically rise in response to shifts to tighter monetary policy.
Keywords: Federal Reserve; Asymmetric Information; Interest Rates; Monetary Policy
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve forecasts (H68) | commercial forecasts (F17) |
| Federal Reserve forecasts (H68) | commercial forecast errors (E37) |
| Federal Reserve forecasts > commercial forecasts (F37) | commercial forecast errors increase (E37) |
| Contractionary monetary policy actions (E52) | commercial inflation forecasts (E31) |
| Federal Reserve private information (E58) | market expectations (D84) |