Monetary Policy Communication Shocks and the Macroeconomy

Abstract

Using federal funds futures data, we show the importance of surprise as a component of monetary policy for U.S. macro variables, both before and after 2008. While GA¼rkaynak et al. (2005) stress the importance of monetary policy for asset prices, much of the subsequent VAR literature attributes all effects of monetary policy on macro variables to surprise changes in the policy rate. Instead, we distinguish between monetary policy action and communication (surprise announcements about future policy moves), both orthogonal to internal Fed information. To do so,we use a decomposition of futures price movements exploiting variation across contract maturities. In a monthly sample from 1994 to 2008, our results indicate that it is mainly shocks - as opposed to actual rate-change surprises - that affect production in the ways traditionally associated with monetary policy shocks.We also use Eurodollar futures to cover the zero-lower bound period and find strong effects on inflation for long-horizon shocks.