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Is the Information Channel of Monetary Policy Alive in Emerging Markets?

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  • Mariana García-Schmidt

Abstract

Central Bank policy decisions affect the economy not only by influencing market conditions through its market interventions but also by shaping the people’s expectations of economic conditions via the announcement of those decisions. This paper studies how forecasts of inflation and output growth respond to unexpected policy rate decisions using datasets for Brazil and Chile that satisfy three conditions: high enough frequency, short-term horizons, and the same source for the dependent and independent variables. The results show that inflation and output forecasts increase in the short run after an unexpected increase in the policy rate, which supports the existence of an information shock behind the monetary policy decision. These results can be explained by a baseline Neo-Keynesian model only when the interest rate provides information about shocks other than the monetary policy shock.

Suggested Citation

  • Mariana García-Schmidt, 2024. "Is the Information Channel of Monetary Policy Alive in Emerging Markets?," Working Papers Central Bank of Chile 1017, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:1017
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_1017.pdf
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    1. Faust Jon & Swanson Eric T & Wright Jonathan H, 2004. "Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-31, October.
    2. Bu, Chunya & Rogers, John & Wu, Wenbin, 2021. "A unified measure of Fed monetary policy shocks," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 331-349.
    3. Lukas Hoesch & Barbara Rossi & Tatevik Sekhposyan, 2023. "Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 355-387, July.
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    6. Mariana García-Schmidt & Michael Woodford, 2019. "Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis," American Economic Review, American Economic Association, vol. 109(1), pages 86-120, January.
    7. Carl E. Walsh, 2010. "Monetary Theory and Policy, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262013770, December.
    8. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
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