Central Bank Information or Neo-Fisher Effect?

The central bank information (CBI) effect and the neo-Fisher effect produce similar outcomes: under both, a monetary tightening fails to reduce inflation and output. Separate estimates of these effects run the risk of confounding one with the other. To disentangle these two channels, we introduce into a new-Keynesian model, among other sources of fluctuations, a permanent monetary shock that generates neo-Fisher effects and a preference shock to which the central bank responds that creates CBI effects. We estimate the model on postwar quarterly U.S. data. We find that both effects are important: The neo-Fisher effect explains about one third of changes in inflation. And shutting down the Fed’s direct response to the preference shock causes a doubling of the variance of inflation and a twenty percent increase in the variance of output. The results are robust to assuming that private agents have imperfect information, suggesting the presence of a central bank information channel, but the absence of a central bank information advantage, at least at quarterly frequency.