Estimating the Market-Perceived Monetary Policy Rule (AEJMacro 2011) w/ Hamilton and Borger

American Economic Journal: Macroeconomics

July 2011, lead article, with J. Hamilton and S. Borger

draft

We introduce a novel method for estimating a monetary policy rule using macroeconomic news. We estimate directly the policy rule agents use to form their expectations by linking news’ effects on forecasts of both economic conditions and monetary policy. Evidence between 1994 and 2007 indicates that the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. These response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.

Web Appendix

Data and Code

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