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Monetary Policy and News Shocks: Are Taylor Rules Forward-Looking?

31 Pages Posted: 27 Dec 2013 Last revised: 16 Dec 2015

Gabriela Best

California State University, Fullerton - Mihaylo College of Business & Economics

Pavel S. Kapinos

Federal Reserve Bank of Dallas--Financial Industry Studies

Date Written: December 15, 2015

Abstract

This paper extends a standard New Keynesian model by introducing anticipated shocks to inflation, output, and interest rates, and by incorporating forward-looking, forecast-targeting Taylor rules. The latter aspect is parsimoniously modeled through the presence of an expected future interest rate term in the Taylor rule that recent literature has found to be economically and statistically important in a variety of settings without anticipated shocks. Using Bayesian econometric methods, we find that the presence of anticipated shocks improves the model's fit to the U.S. data but substantially decreases the weight on future macroeconomic variables in the forward-looking Taylor rule. Our results suggest that, although communicating its intentions regarding future monetary policy conduct, as modeled by anticipated monetary shocks, plays an important role for the Fed, responding to its expectations of future macroeconomic conditions does not. Furthermore, we conduct extensive robustness checks with respect to modeling the forward-looking specification of the Taylor rule that confirm our baseline results.

Keywords: New Keynesian model; Monetary policy; Anticipated shocks; Calvo-type Taylor rule; Forward guidance

JEL Classification: E31, E32, E52

Suggested Citation

Best, Gabriela and Kapinos, Pavel S., Monetary Policy and News Shocks: Are Taylor Rules Forward-Looking? (December 15, 2015). Available at SSRN: https://ssrn.com/abstract=2371965 or http://dx.doi.org/10.2139/ssrn.2371965

Gabriela Best

California State University, Fullerton - Mihaylo College of Business & Economics ( email )

P.O. Box 6848
Fullerton, CA CA 92834-6848
United States

HOME PAGE: http://www.gabrielabest.com/

Pavel S. Kapinos (Contact Author)

Federal Reserve Bank of Dallas--Financial Industry Studies ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://https://sites.google.com/site/pavelkapinos/

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