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American Economic Journal: Macroeconomics: Vol. 3 No. 3 (July 2011)

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Estimating the Market-Perceived Monetary Policy Rule

Article Citation

Hamilton, James D., Seth Pruitt, and Scott Borger. 2011. "Estimating the Market-Perceived Monetary Policy Rule." American Economic Journal: Macroeconomics, 3(3): 1-28.

DOI: 10.1257/mac.3.3.1

Abstract

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. (JEL C51, E31, E43, E52, E58)

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Authors

Hamilton, James D. (U CA, San Diego)
Pruitt, Seth (Federal Reserve Board)
Borger, Scott (US Office of Immigration Statistics)

JEL Classifications

C51: Model Construction and Estimation
E31: Price Level; Inflation; Deflation
E43: Interest Rates: Determination, Term Structure, and Effects
E52: Monetary Policy
E58: Central Banks and Their Policies

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American Economic Journal: Macroeconomics


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