Looking Beyond the Fed: Do Central Banks Cause Information Effects?
Several papers present forecasts of improved economic conditions following a surprise monetary policy tightening as evidence of central bank information effects. They theorize that by tightening policy, a central bank conveys a signal about its positive view of the economy. This signal leads to the improved forecasts. Such forecasts contradict standard monetary theory, which holds that policy tightening should cause forecasts to worsen. Other papers argue against the existence of these effects. The research focuses primarily on the Federal Reserve, but this narrow focus limits the number of monetary policy surprises that can be studied. Consequently, choices regarding samples and specifications can lead to large differences in results. In contrast to the existing research, this paper studies the central banks of nine developed countries not including the United States. By doing so, it obtains a measure of precision that is an order of magnitude greater than that of previous studies. Using high-frequency data on interest rates, dates and times of monetary policy meetings, and the changes in forecasts around those meetings, this paper looks for evidence of central bank information effects across and within those nine countries.