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.
Key Findings
- Monetary policy tightening is associated with forecasts of improved domestic economic conditions that are significant across the panel of central banks and for the individual banks, which would appear to indicate the existence of central bank information effects.
- However, monetary policy surprises correlate with the broader economic conditions prevailing before monetary policy meetings; that is, central banks are likely to tighten monetary policy by more than expected when the economy is doing well (and loosen it by more than expected when the economy is doing poorly)
- Once the predictability of monetary policy surprises is taken into account, there is no evidence of central bank information effects at the aggregate or individual central bank level.
Implications
If, as this paper’s findings indicate, information effects do not exist or are outweighed by the effects predicted by standard monetary theory, a central bank should not expect domestic economic forecasts to improve when it tightens monetary policy.
Abstract
The importance of central bank information effects is the subject of an ongoing debate. Most work in this area focuses on the limited number of monetary policy events at the Federal Reserve. I assess the degree to which nine other central banks cause information effects. This analysis yields a much larger panel of primarily novel events. Following a surprise monetary tightening, economic forecasts improve in line with information effects. However, I find this outcome is driven by the predictability of monetary policy surprises and not information effects. My results support the view that central bank information effects may be overstated.