High Frequency Identification of Monetary Non-Neutrality: The Information Effect

By Emi Nakamura, Jón Steinsson. 2018

1,031 citations recorded by the source corpus.

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.

View Paper: https://www.semanticscholar.org/paper/8cf6cb5c1aa6603cbccc99aa3810702c0530ec0a

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

1. P. Andrade
2. P. Karadi
3. M. Gertler
4. Filippo Ferroni
5. Anna Cieślak
6. Edward Herbst
7. M. McLeay
8. Dario Caldara

Citations in the corpus

• The Time-Varying Effect of Monetary Policy on Asset Prices (2017, unknown): “Nakamura and Steinsson (2018) find that β is of the “wrong” sign; it is positive and statistically significant, such that private forecasters increase their expectations of output growth in the near future after positive monetary policy surprises − evidence of the information effect.”
• Monetary Policy Surprises, Credit Costs, and Economic Activity † (2014, background): “Both Hanson and Stein (2012) and Nakamura and Steinsson (2013) have shown using TIPS data that virtually all the respon- siveness of nominal rates to policy surprises on FOMC dates reflects variation in real rates, with a negligible response of expected inflation.”
• Monetary Policy, Corporate Finance and Investment (2018, unknown): “We isolate a time series of monetary policy shocks by exploiting the high frequency surprises in interest rate futures contracts within a 30 minute window around policy announcements, following Gurkaynak et al. (2005), Gertler and Karadi (2015) and Nakamura and Steinsson (2018a).”
• Optimal Inflation and the Identification of the Phillips Curve (2019, methodology): “The final column uses a variant of the instrument used by Nakamura and Steinsson (2014) and interacts the 3-year log change in defense consumption with a metro area fixed effect rather than the Bartik exposure variable.”
• Non-monetary news in central bank communication (2018, background): “Nakamura and Steinsson (2018) propose a model in which monetary policy announcements convey information about both future monetary policy and economic fundamentals; this information, in turn, affects investors’ beliefs about the natural real rate.”