Disagreement About Monetary Policy

65 Pages Posted: 24 Aug 2019 Last revised: 10 Apr 2021

See all articles by Karthik Sastry

Karthik Sastry

Massachusetts Institute of Technology (MIT)

Date Written: July 17, 2019

Abstract

Using US data since 1995, I document that “bad macroeconomic news” in public signals predicts market over-estimation of interest rates, excessive market optimism about employment, and delayed correction in these forecasts. In a stylized model that can accommodate such patterns via three leading mechanisms—asymmetries between the market and central bank in their signals about fundamentals, beliefs about the monetary rule, and confidence in public data—I show that the last is the most empirically relevant. The calibrated model implies that the market’s relative under-reaction to news substantially dampens the response of asset prices to fundamentals, while the central bank’s signaling through actions or “information effect” has almost no role.

Keywords: monetary policy, disagreement, high-frequency identification

JEL Classification: E52, G14, E44

Suggested Citation

Sastry, Karthik, Disagreement About Monetary Policy (July 17, 2019). Available at SSRN: https://ssrn.com/abstract=3421723 or http://dx.doi.org/10.2139/ssrn.3421723

Karthik Sastry (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

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50 Memorial Drive
Cambridge, MA 02139-4307
United States

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