Changes in the Federal Reserve Communication Strategy

A Structural Investigation

March 2011
Yasuo Hirose^*1
Takushi Kurozumi^*2

Abstract

This paper structurally investigates the changes in the Federal Reserve's communication strategy during the 1990s by analyzing anticipated and unanticipated disturbances to a Taylor rule. The anticipated monetary policy disturbances are identified by estimating a medium-scale dynamic stochastic general equilibrium model with the term structure of interest rates, using the U.S. data that includes bond yields. The estimation results show that the Fed made its future policy actions unanticipated for market participants until the mid-1990s, but thereafter, the Fed tended to coordinate market expectations about future policy actions. This finding suggests that the changes in the Fed's communication strategy are consistent with the rise of the academic views on central banking as management of expectations. The inclusion of bond yields in the data for estimation is indispensable to the finding because the yields contain crucial information on the expected future path of the federal funds rate. Moreover, it is demonstrated that the presence of bond yields data generates a substantial contribution of monetary policy disturbances to business cycles.

Keywords
Monetary policy disturbance, Central bank communication, Management of expectations, Term structure of interest rates, Federal Reserve

JEL classification
E52, E58

The authors are grateful for comments and discussions to Masayoshi Amamiya, Kosuke Aoki, Hiroshi Fujiki, Ippei Fujiwara, Marvin Goodfriend, Hibiki Ichiue, Hirokazu Ishise, Ryo Kato, Takeshi Kato, Kentaro Koyama, Shigeki Kushida, Nobuyuki Oda, Shinsuke Ohyama, Toshitaka Sekine, Mototsugu Shintani, Shigenori Shiratsuka, Kazuo Ueda, and Kozo Ueda, as well as participants at the IMES Brown Bag Seminar. Any remaining errors are the sole responsibility of the authors. The views expressed herein are those of the authors and should not be interpreted as those of the Bank of Japan.

*1 Faculty of Economics, Keio University
E-mail : yhirose@econ.keio.ac.jp
*2 Monetary Affairs Department, Bank of Japan
E-mail : takushi.kurozumi@boj.or.jp

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