The Market-Perceived Monetary Policy Rule
The authors introduce a novel method for estimating a monetary policy rule using macroeconomic news. Market forecasts of both economic conditions and monetary policy are affected by news, and their estimation links the two effects. This enables them to estimate directly the policy rule agents use to form their expectations, and in so doing flexibly capture the particular dynamics of policy response. They find evidence that between 1994 and 2007 the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude.