Author: Jonathan H. Wright / Publishing Institution: Board of Governors of the Federal Reserve System

Author:: Jonathan H. Wright, Jon Faust, and Eric Swanson
Publication Date:: 02-2002
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: Using the prices of federal funds futures contracts, we measure the impact of the surprise component of Federal Reserve policy decisions on the expected future trajectory of interest rates. We show how this information can be used to identify the effects of a monetary policy shock in a standard monetary policy VAR. This constitutes an alternative approach to identification that is quite different, and, we would argue, more plausible, than the conventional short-run restrictions. We find that the usual recursive identification of the model is rejected, but we nevertheless agree with the literature's conclusion that only a small fraction of the variance of output can be attributed to monetary policy shocks.
Topic:: Economics, Emerging Markets, and International Trade and Finance
Political Geography:: United States

Author:: John H. Rogers, Jonathan H. Wright, and Jon Faust
Publication Date:: 08-2001
Content Type:: Working Paper
Institution:: Board of Governors of the Federal Reserve System
Abstract:: We estimate a monetary policy reaction function for the Bundesbank and use it as a benchmark to assess the monetary policy of the ECB since the launch of the euro in January 1999. We find that euro interest rates are low relative to this benchmark. We consider several possible reasons for this, including the divergence between core and headline inflation, inflation having turned out to be higher than could have been foreseen by the ECB and the possibility that the ECB is focussing only on macroeconomic conditions in a subset of member countries. We argue that these potential explanations cannot account for the difference between recent interest rates and our estimated Bundesbank benchmark. Our results suggest that the reaction function of the ECB features a high weight on the output gap relative to the weight on inflation, compared to the Bundesbank.
Topic:: Development, Economics, and International Trade and Finance
Political Geography:: United States

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