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Signaling Effects of Monteray Policy

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  • Leonardo Melosi

    (Federal Reserve Bank of Chicago)

Abstract

We develop a DSGE model in which the policy rate signals to price setters the central bank's view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters' inflation expectations. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances, even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. In the 1970s, the Federal Reserve's disinflation policy, which was characterized by gradual increases in the policy rate, was counterproductive because it ended up signaling inflationary shocks.

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  • Leonardo Melosi, 2014. "Signaling Effects of Monteray Policy," 2014 Meeting Papers 830, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:830
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    3. Hoffmann, Mathias & Hürtgen, Patrick, 2016. "Inflation expectations, disagreement, and monetary policy," Economics Letters, Elsevier, vol. 146(C), pages 59-63.

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