The Yield Curve Slope and Monetary Policy Innovations

Edward N. Gamber and Fred Joutz
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Edward N. Gamber: Department of Economics and Business, Lafayette College

No 171, Economics Series from Institute for Advanced Studies

Abstract: We separate changes of the federal funds rate into two components; one reflects the Fed's superior forecasts about the state of the economy and the other component reflects the Fed's reaction to the public's forecast about the state of the economy. Romer and Romer (2000) found that the Fed reveals information about inflation when it tightens monetary policy. Their research has implications for measuring monetary policy as well. When the Fed raises short-term interest rates it leads to some combination of increased inflationary expectations and an increased real rate. In this paper we estimate a structural VAR that allows us to separate out (identify) components of federal funds changes that are due to inflationary expectations (thus neutral) and that part which is contractionary. Our measure of monetary policy is the part of federal funds changes that exclude the Fed's revelation of its asymmetric information about future inflation.

Keywords: Monetary policy; Yield curve; Inflation; Price puzzle (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2005-05
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Citations: View citations in EconPapers (1)

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https://irihs.ihs.ac.at/id/eprint/1631 First version, 2005 (application/pdf)

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