Disagreement About Monetary Policy

71 Pages Posted: 24 Aug 2019 Last revised: 15 Aug 2022

See all articles by Karthik Sastry

Karthik Sastry

Harvard University, Department of Economics

Date Written: August 12, 2022

Abstract

Using a model of monetary policymaking with belief distortions, I propose tests to distinguish among three leading explanations for disagreement between markets and central banks: asymmetric information, different beliefs about the monetary rule, and different confidence in public signals. Implementing these tests in US data, I find that bad macroeconomic news predicts market over-estimation of both interest rates and employment relative to realizations and Federal-Reserve forecasts. I show that different confidence in public signals is necessary to explain these findings. Quantitatively, this mechanism significantly dampens market beliefs’ responsiveness to fundamentals. Central-bank signaling about fundamentals, by contrast, has much smaller effects.

Keywords: monetary policy, disagreement, high-frequency identification

JEL Classification: E52, D84, E44, G14

Suggested Citation

Sastry, Karthik, Disagreement About Monetary Policy (August 12, 2022). Available at SSRN: https://ssrn.com/abstract=3421723 or http://dx.doi.org/10.2139/ssrn.3421723

Karthik Sastry (Contact Author)

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

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