The Information Effect of Monetary Policy is Optimal, Not Self-Defeating, find Cleveland Fed Researchers
As the Federal Reserve has become more transparent about its decisions, the general public has begun to regard the federal funds rate as not only a benchmark interest rate, but also as a signal about the state of the economy. In this Economic Commentary, Cleveland Fed researchers Wesley Janson and Chengcheng Jia investigate what the information effect of monetary policy is and whether such an information effect is optimal.
The researchers find evidence that the public understands monetary policy decisions as revealing information about future output growth, not inflation. As such, the information effect reinforces the effectiveness of monetary policy, since the central bank’s optimal strategy is to reveal information about demand shocks rather than supply shocks.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
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