NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

High Frequency Identification of Monetary Non-Neutrality: The Information Effect

Emi Nakamura, Jón Steinsson

NBER Working Paper No. 19260
Issued in July 2013
NBER Program(s):   EFG   ME

We present estimates of monetary non-neutrality based on evidence from high-frequency responses of real interest rates, expected inflation, and expected output growth. Our identifying assumption is that unexpected changes in interest rates in a 30-minute window surrounding scheduled Federal Reserve announcements arise from news about monetary policy. In response to an interest rate hike, nominal and real interest rates increase roughly one-for-one, several years out into the term structure, while the response of expected inflation is small. At the same time, forecasts about output growth also increase|the opposite of what standard models imply about a monetary tightening. To explain these facts, we build a model in which Fed announcements affect beliefs not only about monetary policy but also about other economic fundamentals. Our model implies that these information effects play an important role in the overall causal effect of monetary policy shocks on output.

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This paper was revised on November 14, 2016

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Document Object Identifier (DOI): 10.3386/w19260

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