High Frequency Identification of Monetary Non-Neutrality
We provide new evidence on the responsiveness of real interest rates and inflation to monetary shocks. Our identifying assumption is that the increase in the volatility of interest rate news in a 30-minute window surrounding scheduled Federal Reserve announcements arises from news about monetary policy. Nominal and real interest rates respond roughly one-for-one several years out into the term structure at these times, implying that changes in expected inflation are small. At longer horizons, the response of expected inflation grows. Accounting for “background noise” in interest rates on FOMC days is crucial in identifying the effects of monetary policy on interest rates, particularly at longer horizons. We show that in conventional business cycle models with nominal rigidities our estimates imply that monetary non-neutrality is large. We also find evidence that FOMC announcements provide the public with information not only about monetary policy but also about the evolution of exogenous economic fundamentals.
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This paper was revised on December 27, 2013
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