Information effects of monetary policy

Abstract

This study assesses two central bank announcements about monetary policy and the central bank’s assessment of the economic outlook. We examine whether these two components influence macroeconomic and financial variables under the effective lower bound (ELB) of short-term nominal interest rates in Japan. We identify two shocks: a surprise policy tightening that raises interest rates and reduces stock prices and the complementary positive central bank information shock that raises both. We find that the two shocks have different effects on the Japanese economy. In fact, a contractionary monetary policy shock decreases inflation rates, whereas a positive central bank information shock increases inflation rates. The evidence suggests that announcements conveying the central bank’s assessment of the economic outlook play a certain role in the transmission mechanism of monetary policy under the ELB. However, our study shows that the two series of shocks do not induce changes in output. This suggests that they have a limited impact on the economy.