High Frequency Identification of Monetary Non-Neutrality: The Information Effect

ECB
By November 16, 2018 14:19

High Frequency Identification of Monetary Non-Neutrality: The Information Effect

The policy news shock is constructed as the first principle component of the change in five interest rates. The first of these is the change in market expectations of the federal funds rate over the remainder of the month in which the FOMC meeting occurs. To construct this variable we use data on the price of the federal funds futures contract for the month in question. The federal funds futures contract for a particular month (say April 2004) trades at price p and pays off 100 − r¯ where r¯ is the average of the effective federal funds rate over the month.1 To construct the change in expectations for the remainder of the month, we must adjust for the fact that a part of the month has already elapsed when the FOMC meeting occurs. Suppose the month in question has m0 days and the FOMC meeting occurs on day d0. Let f 1 t−∆t denote the price of the current month’s federal funds rate futures contract immediately before the FOMC announcement and f 1 t the price of this contract immediately following the FOMC announcement. Let r−1 denote the average federal funds rate during the month up until the point of the FOMC announcement and r0 the average federal funds rate for the remainder of the month. Then

ECB
By November 16, 2018 14:19

SEARCH