The Market-Perceived Monetary Policy Rule

36 Pages Posted: 17 Nov 2009

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Seth Pruitt

Arizona State University (ASU) - Finance Department

Scott C. Borger

Department of Homeland Security - Office of Immigration Statistics

Date Written: November 16, 2009

Abstract

We introduce a novel method for estimating a monetary policy rule using macroeconomic news. Market forecasts of both economic conditions and monetary policy are affected by news, and our estimation links the two effects. This enables us to estimate directly the policy rule agents use to form their expectations, and in so doing flexibly capture the particular dynamics of policy response. We find evidence that between 1994 and 2007 the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. In a standard model we show that output smoothing caused by a larger inflation response magnitude is offset by the more measured pace of response. Our response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.

Keywords: Monetary policy rule, market perceptions, Taylor Rule, Fed funds futures

JEL Classification: E43, E52, E58

Suggested Citation

Hamilton, James D. and Pruitt, Seth and Borger, Scott C., The Market-Perceived Monetary Policy Rule (November 16, 2009). FRB International Finance Discussion Paper No. 982, Available at SSRN: https://ssrn.com/abstract=1507247 or http://dx.doi.org/10.2139/ssrn.1507247

James D. Hamilton (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
Mail code: 0508
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619-534-5986 (Phone)
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National Bureau of Economic Research (NBER)

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Seth Pruitt

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Scott C. Borger

Department of Homeland Security - Office of Immigration Statistics ( email )

United States

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