An Alternative Explanation for the "Fed Information Effect"
Michael D. Bauer, Eric T. Swanson
American Economic Review · 2023 · Volume 113 · Issue 3
Abstract
Regressions of private-sector macroeconomic forecast revisions on monetary policy surprises often produce coefficients with signs opposite to standard macroeconomic models. The "Fed information effect" argues these puzzling results are due to monetary policy surprises revealing Fed private information. We show they are also consistent with a "Fed response to news" channel, where both the Fed and professional forecasters respond to incoming economic news. We present new evidence challenging the Fed information effect and supporting the Fed response to news channel, including: regressions that control for economic news, our own survey of professional forecasters, and financial market responses to FOMC announcements.
Keywords
Asymmetric and Private Information, Mechanism Design, Macroeconomics: Production, Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications, Interest Rates: Determination, Term Structure, and Effects, Financial Markets and the Macroeconomy, Monetary Policy, Central Banks and Their Policies
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