Temporal Aggregation Bias and Monetary Policy Transmission

Abstract

Temporal aggregation biases estimates of monetary policy effects. We hypothesize that information mismatches between private agents and the econometrician—the source of temporal aggregationbias—are as important as the more studied mismatch between private agents and the centralbank (the “Fed information effect”) in the study of monetary policy transmission. In impulse responsesfrom both local projections and an unobserved components model, we find that the responseof daily inflation to high-frequency monetary shocks confirms theoretical predictions. If thereis an adverse-signed response such that inflation increases in response to a contractionary monetaryshock, it is much less prominent than previously thought and explained by frequency mismatches ofshocks and dependent variables.