We are grateful to the Editor, Pok-sang Lam, and two anonymous referees for extremely helpful comments and suggestions.
The Effects of Monetary Policy “News” and “Surprises”
Article first published online: 28 NOV 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 8, pages 1667–1692, December 2012
How to Cite
MILANI, F. and TREADWELL, J. (2012), The Effects of Monetary Policy “News” and “Surprises”. Journal of Money, Credit and Banking, 44: 1667–1692. doi: 10.1111/j.1538-4616.2012.00549.x
- Issue published online: 28 NOV 2012
- Article first published online: 28 NOV 2012
- Received July 14, 2009; and accepted in revised form December 6, 2011.
- anticipated and unanticipated monetary policy shocks;
- news shocks;
- New Keynesian model with news shocks;
- effects of monetary policy on output
There is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks. The shocks that are investigated, however, almost exclusively represent unanticipated changes in policy, which surprise the private sector and which are typically found to have a delayed and sluggish effect on output. In this paper, we estimate a New Keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks. The paper shows that the conventional estimates confound two distinct effects on output: an effect due to unanticipated or “surprise” shocks, which is smaller and more short-lived than the response usually obtained in the literature, and a large, delayed, and persistent effect due to anticipated policy shocks or “news.” News shocks play a larger role in influencing the business cycle than unanticipated policy shocks, although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited.