Monetary Policy and News Shocks: Are Taylor Rules Forward-Looking?
31 Pages Posted: 27 Dec 2013 Last revised: 16 Dec 2015
Date Written: December 15, 2015
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: Suggested Citation