Perfecting the Market's Knowledge of Monetary Policy

By W. Poole, Robert Rasche. 2000

131 citations recorded by the source corpus.

The rational expectations revolution made clear that a complete macro model requires a specification of the government's economic policy. We argue that monetary policy should be conducted in such a way that the market can predict policy actions. An implication of market success in predicting policy actions is that interest rates move ahead of the policy actions, and such a timing relationship may appear to some as the central bank following the market instead of leading it. Another implication of the market predicting policy actions is that nominal interest rate changes provide no useful information to the central bank about the strength of aggregate demand or inflationary expectations. Finally, failure of the market to predict policy actions reflects a problem that needs to be addressed.We explore the theoretical implications of a monetary policy that is completely specified and perfectly understood by the market. We construct a bare-bones model to illustrate the key concepts. Finally, we conduct an empirical investigation of these issues, especially in the context of monetary policy since 1988, when the establishment of the federal funds future market made available well-defined market information on expectations about Fed policy actions. We find that when the intended funds rate is changed, interest rates over the maturity spectrum respond to “news” measured by changes in the one-month-ahead funds futures yield but do not respond to the anticipated component of the change in the intended funds rate.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/4286b051acae5a0cb84ec4af1701d18fcbc4d3c8

Citations in the corpus

• Stock market response to monetary and fiscal policy shocks: Multi-country evidence (2013, unknown): “In this respect, Poole and Rasche (2000), Kuttner (2001), Bomfim (2003), as well as, Bernanke and Kuttner (2005), among others, support the view that monetary policy decisions may influence financial markets in more than one way; that is, through their effects on real interest rates, expected…”
• The ECB Monetary Policy Strategy and the Money Market (2001, unknown): “Here it follows Poole and Rasche (2000).”
• Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts? (2006, unknown): “Poole and Rasche (2000) and Poole, Rasche, and Thornton (2002) note that the frequency of days on which federal funds futures rates changed by a large amount (6 basis points or more) decreased from the pre-1994 to the post-1994 period, and that some case studies of federal funds futures behavior…”
• Market Anticipations of Monetary Policy Actions (2002, unknown): “JULY/AUGUST 2002 65”
• Market-Based Measures of Monetary Policy Expectations (2002, unknown): “Kuttner (2001) and Faust, Swanson, and Wright (2004) used the current-month federal funds futures contract, Bomfim (2003) and Poole and Rasche (2000) the month-ahead federal funds futures contract, Cochrane and Piazzesi (2002) the one-month eurodollar deposit rate, Ellingsen and Soderstrom (2004)…”
• Four stories of quantitative easing (2013, unknown): “Given the emerging consensus in favor of transparent and predictable policy (Poole and Rasche, 2000), it seems likely there will be pressure to incorporate such strategies in conditional policy rules if they are to be used (Bullard, 2010).”