IDEAS home Printed from https://ideas.repec.org/p/fip/fedcwq/97469.html
   My bibliography  Save this paper

How Important Is the Information Effect of Monetary Policy?

Author

Abstract

Is the "information effect" of monetary policy quantitatively important? We first use a simple model to show that under asymmetric information, monetary policy surprises are correlated with the unobserved state of the economy. This correlation implies that monetary policy surprises provide information about the state of the economy, and at the same time, explains why the estimation of the information effect may be biased. We then develop a New Keynesian DSGE model under asymmetric information and calibrate model parameters to match macroeconomic dynamics in the US and forecasting accuracy in the Greenbook. Under our calibration, both the central bank and the private sector initially have noisy information. Over time, the information effect of monetary policy mitigates information frictions by enhancing the two-way learning between the central bank and the private sector.

Suggested Citation

  • Zhao Han & Chengcheng Jia, 2023. "How Important Is the Information Effect of Monetary Policy?," Working Papers 23-32, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:97469
    DOI: 10.26509/frbc-wp-202332
    as

    Download full text from publisher

    File URL: https://doi.org/10.26509/frbc-wp-202332
    File Function: Persistent Link
    Download Restriction: no
    File URL: https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/publications/working-papers/2023/wp2332.pdf
    File Function: Full Text
    Download Restriction: no
    File URL: https://libkey.io/10.26509/frbc-wp-202332?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Han, Zhao & Tan, Fei & Wu, Jieran, 2022. "Analytic policy function iteration," Journal of Economic Theory, Elsevier, vol. 200(C).
    2. Kurt G. Lunsford, 2020. "Policy Language and Information Effects in the Early Days of Federal Reserve Forward Guidance," American Economic Review, American Economic Association, vol. 110(9), pages 2899-2934, September.
    3. Michael D. Bauer & Eric T. Swanson, 2023. "An Alternative Explanation for the "Fed Information Effect"," American Economic Review, American Economic Association, vol. 113(3), pages 664-700, March.
    4. Alexandre N. Kohlhas, 2022. "Learning by Sharing: Monetary Policy and Common Knowledge," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 324-364, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gürkaynak, Refet S. & Kara, A. Hakan & Kısacıkoğlu, Burçin & Lee, Sang Seok, 2021. "Monetary policy surprises and exchange rate behavior," Journal of International Economics, Elsevier, vol. 130(C).
    2. Andrew B. Martinez, 2025. "How do Macroeconomic Expectations React to Extreme Weather Shocks?," Working Papers 2025-001, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    3. Checo, Ariadne & Grigoli, Francesco & Sandri, Damiano, 2024. "Monetary Policy Transmission in Emerging Markets: Proverbial Concerns, Novel Evidence," CEPR Discussion Papers 18954, C.E.P.R. Discussion Papers.
    4. Christopher S. Sutherland, 2020. "Forward Guidance and Expectation Formation: A Narrative Approach," Staff Working Papers 20-40, Bank of Canada.
    5. Jung, Alexander, 2023. "US monetary policy spillovers to European banks," Working Paper Series 2876, European Central Bank.
    6. Inessa BENCHORA & Aurélien LEROY & Louis RAFFESTIN, 2023. "Is Monetary Policy Transmission Green?," Bordeaux Economics Working Papers 2023-08, Bordeaux School of Economics (BSE).
    7. Margaret M. Jacobson & Christian Matthes & Todd B. Walker, 2022. "Inflation Measured Every Day Keeps Adverse Responses Away: Temporal Aggregation and Monetary Policy Transmission," Finance and Economics Discussion Series 2022-054, Board of Governors of the Federal Reserve System (U.S.).
    8. Schmeling, Maik & Schrimpf, Andreas & Steffensen, Sigurd A.M., 2022. "Monetary policy expectation errors," Journal of Financial Economics, Elsevier, vol. 146(3), pages 841-858.
    9. Davig, Troy & Foerster, Andrew, 2023. "Communicating Monetary Policy Rules," European Economic Review, Elsevier, vol. 151(C).
    10. Couture, Cody, 2021. "Financial market effects of FOMC projections," Journal of Macroeconomics, Elsevier, vol. 67(C).
    11. Christophe Blot & Caroline Bozou & Jérôme Creel & Paul Hubert, 2021. "Are all Central Bank Asset Purchases the Same? Different Rationales, Different Effects," SciencePo Working papers Main hal-03554141, HAL.
    12. Taeyoung Doh & Dongho Song & Shu-Kuei X. Yang, 2020. "Deciphering Federal Reserve Communication via Text Analysis of Alternative FOMC Statements," Research Working Paper RWP 20-14, Federal Reserve Bank of Kansas City.
    13. Matthew V. Gordon & Kurt Graden Lunsford, 2024. "The Effects of the Federal Reserve Chair’s Testimony on Treasury Interest Rates," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2024(01), pages 1-7, January.
    14. Meyer-Gohde, Alexander, 2024. "Solving and analyzing DSGE models in the frequency domain," IMFS Working Paper Series 207, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    15. Frederic Boissay & Fabrice Collard & Cristina Manea & Adam Shapiro, 2023. "Monetary tightening, inflation drivers and financial stress," BIS Working Papers 1155, Bank for International Settlements.
    16. Pirozhkova, Ekaterina & Ricco, Giovanni & Viegi, Nicola, 2024. "Trouble Every Day: Monetary Policy in an Open Emerging Economy," CEPR Discussion Papers 19094, C.E.P.R. Discussion Papers.
    17. Christopher D. Cotton, 2022. "Looking Beyond the Fed: Do Central Banks Cause Information Effects?," Working Papers 22-21, Federal Reserve Bank of Boston.
    18. Hie Joo Ahn & Leland E. Farmer, 2024. "Disagreement About the Term Structure of Inflation Expectations," Finance and Economics Discussion Series 2024-084, Board of Governors of the Federal Reserve System (U.S.).
    19. Han, Zhao, 2024. "Asymmetric information and misaligned inflation expectations," Journal of Monetary Economics, Elsevier, vol. 143(C).
    20. Kraft, Kornelius & Lammers, Alexander, 2021. "Bargaining Power and the Labor Share - a Structural Break Approach," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242342, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    monetary policy; information frictions; asymmetric information;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedcwq:97469. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: 4D Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbclus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.