Monetary Policy Communication Shocks and the Macroeconomy
48 Pages Posted: 7 Dec 2018 Last revised: 21 Feb 2019
Date Written: 2018
Using federal funds futures data, we show the importance of surprise communication as a component of monetary policy for U.S. macro variables, both before and after 2008. While GÃ¼rkaynak et al. (2005) stress the importance of monetary policy communication for asset prices, much of the subsequent VAR literature attributes all effects of monetary policy on macro variables to surprise changes in the policy rate. Instead, we distinguish between monetary policy action and "communication shocks" (surprise announcements about future policy moves), both orthogonal to internal Fed information. To do so,we use a decomposition of futures price movements exploiting variation across contract maturities. In a monthly sample from 1994 to 2008, our results indicate that it is mainly communication shocks - as opposed to actual rate-change surprises - that affect production in the ways traditionally associated with monetary policy shocks.We also use Eurodollar futures to cover the zero-lower bound period and find strong effects on inflation for long-horizon communication shocks.
Keywords: Federal Funds Futures, FOMC, Monetary Policy, VAR Model
JEL Classification: E52, E58, G23, C32
Suggested Citation: Suggested Citation