Forward-Looking Monetary Policy and the Transmission of Conventional Monetary Policy Shocks

30 Pages Posted: 14 May 2020

See all articles by Chunya Bu

Chunya Bu

University of Rochester

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Wenbin Wu

Fudan University

Date Written: February 13, 2020

Abstract

Standard structural VAR models and estimation using Romer and Romer (2004) monetary policy shocks show that, in samples after the 1980s, a contractionary conventional monetary policy shock generates smaller and sometimes perversely-signed impulse responses compared to earlier samples. Using insights from the central bank information effects literature, we show that the analyses producing these results suffer from an omitted variables problem related to forward-looking information emanating from Federal Reserve forecasts. Transmission of conventional monetary policy shocks takes on the standard signs, and is typically significant, once Fed forward-looking information is taken into account. This reconciliation does not follow from adding private sector forecasts to the estimation frameworks.

Keywords: Information effect; Monetary policy; VARs

Suggested Citation

Bu, Chunya and Rogers, John H. and Wu, Wenbin, Forward-Looking Monetary Policy and the Transmission of Conventional Monetary Policy Shocks (February 13, 2020). FEDS Working Paper No. 2020-014 https://doi.org/10.17016/FEDS.2020.014, Available at SSRN: https://ssrn.com/abstract=3600423

Chunya Bu

University of Rochester

300 Crittenden Blvd.
Rochester, NY 14627
United States

John H. Rogers (Contact Author)

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Wenbin Wu

Fudan University

Beijing West District Baiyun Load 10th
Shanghai, 100045
China

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