Journal

USING PRIVATE FORECASTS TO ESTIMATE THE EFFECTS OF MONETARY POLICY

The journal develops a methodology that uses the forecasts of market participants and of policy makers to estimate the effects of monetary policy on output and inflation. The approach has advantages over the standard practice of fitting a vector auto regression (VARs) to the data. The author apply his methodology to data on output, interest rates and prices. He find that, even using the Federal Reserve Board’s Greenbook forecasts to control for the policy maker’s information set, prices rise initially in response to a monetary contraction. This finding undermines the standard justification for including an index of commodity prices in VARs. The author used empirical application which is contrast from impulse response function to those obtained from VARs. The results that he got is it compares the impulse response of real GDP and the GDP deflator to a one percentage point innovation in the 3-month T-bills rate using different methodologies. There are also three robustness experiments performed in order to controlling for the contemporaneous effect of commodity prices including a measure of reserves to control for the effect of money demand innovations and altering the sample period.

The main constraint on this methodology arises from the limited availability of market-based expectations data. Some future’s market, such as those for GDP and inflation, are just in their infancy. This constraints the sample period over which the methodology can be applied to these variables. Others, such as those for interest rates, provide forecasts only at short horizons. This limits author’s ability to construct impulse response functions. In the case of interest rates, this makes it difficult to estimate the effect of monetary policy on the term structure of interest rates or to analyze the liquidity puzzle. As these markets expand their coverage, author’s methodology should provide an attractive...