Results

Table 2.2 displays the results of estimating the model from equation (2.1) for different samples. In all cases, positive monetary policy surprises, i.e. interest rate increases, sig-nificantly increase inflation expectations. However, the magnitude of the effect differs depending on the sample. Columns (1) and (2) include all observations with a panel dimension from January 1994 to December 2016. Comparing columns (1) and (2) high-lights the importance of including current inflation rates as control variables. Both inflation measures are highly significant, and their inclusion increases the estimated effect of monetary policy on expectations.

In column (3), I exclude the largest and smallest 1% of reported inflation expecta-tions in each month. To exclude outlier observaexpecta-tions is standard practice when analyz-ing inflation expectations (see e.g., Pfajfar and Santoro 2013).¹⁸ This exclusion does not affect results much.

15In months with several meetings, I use the one that was scheduled or the one that was not a confer-ence call because those are usually the regular meetings.

16For simplicity, I combine the aggregate constant effect with the constant individual specific effect.

17In Enders, Hünnekes, and Müller (2019b), we have data on the day of response for a survey of German firms. We exploit this timing to only focus on firms responding closely around monetary policy meetings. However, we also show results using all firms responding in the month following the meeting and find qualitatively similar results.

18I prefer to exclude observations based on the distribution in each month instead of excluding fixed values because changes over time may make values which were previously considered unrealistic more plausible. In addition, using relative cut-offs implies that in each month roughly the same number of households are excluded which does not affect the overall sample as much.

Table 2.2: Baseline results, monetary policy and inflation expectations Dependent variable: inflation expectations int

(1) (2) (3) (4) (5) (6)

All Add infl. Ex. largest Ex. largest Ex. largest Ex. 01/2009

exp. neg. FF pos. FF

FF surprise,t-1 1.14*** 1.96*** 2.07*** 3.66*** 3.59*** 1.00**

(0.43) (0.43) (0.38) (0.53) (0.54) (0.50)

Gas price 0.04*** 0.04*** 0.04*** 0.04*** 0.04***

inflation,t (0.00) (0.00) (0.00) (0.00) (0.00)

Food price 0.77*** 0.74*** 0.70*** 0.67*** 0.63***

inflation,t (0.07) (0.06) (0.06) (0.06) (0.06)

Observations 91748 91748 89964 88612 87630 86988

Households 45874 45874 44982 44306 43815 43494

Within R² 0.00 0.01 0.01 0.01 0.01 0.01

Notes: FF surprise: surprise change in the 3-month federal funds future around FOMC meetings.

Inflation expectations are from the Michigan Survey of Consumers, and refer to the next 12 months.

Realized inflation is measured as the month-on-month change in the price level for food and gasoline products, respectively. Cluster-adjusted robust standard errors in parentheses. *p<0.1, **p<0.05,

***p<0.01.

Columns (4) to (6) consider the effect of excluding large monetary policy surprises.

The exclusion of the largest two negative surprises leads to a significant increase in the effect.¹⁹ Excluding the largest two positive surprises does not have a big effect, as shown in column (5). However, one relatively large negative surprise has a large effect on the estimation. In column (6), I exclude the surprise from December 2008, i.e. survey observations from January 2009. This is the month the Fed first reached the zero lower bound (ZLB) and changed to a target range. The measured surprise in this month is -0.185 percentage points. Excluding it reduces the estimated coefficient from 3.59 to 1.00. This change highlights the importance of controlling for outliers.

Therefore, I choose the specification from column (6) as the baseline.

Quantitatively the results imply a positive monetary policy surprise leads to a one for one increase in inflation expectations, i.e. a one standard deviation surprise (5 basis points or 0.05 percentage points) increases inflation expectations by 0.05 percentage points. This is a small effect, which is not surprising given the size of the observed surprises. However, the fact that these small surprises measured in a small window around the meetings impact expectations significantly at all is meaningful as such. In addition, the observed effect is probably a mixture of effects from households who do not react at all and those that do react. In Subsection 2.3.2, I further analyze the effects for different demographic groups. In fact, the effect is about twice as large as

19The largest two negative surprises -0.37 percentage points in April 2004 and -0.25 percentage points in October 1998.

CHAPTER 2. MONETARYPOLICY AND HOUSEHOLDEXPECTATIONS 64

the baseline effect for some of these groups.

The sign of the effect implies that a surprise policy tightening leads households to revise their inflation expectations upward, not downward as the standard channel of monetary policy would imply. This result is in line with households reacting more strongly to the perceived information content of the announcement than to the effect of the announced policy: if the central bank announces a policy that is more tighten-ing than expected by financial markets, this implies that inflation may increase more than previously thought. Therefore, households revise their inflation expectations up-wards. They thus pay less attention to the fact that higher interest rates should lower inflation in the future in line with standard monetary policy transmission. I support this interpretation by showing that also newspaper articles refer to high or increasing inflation more frequently after tightening surprises in Section 2.4.

In addition to considering outlier observations regarding the size of surprises, it is useful to control for special episodes of monetary policy over the course of the sample.

Table 2.3 shows estimations allowing for different effects at the ZLB, during the great financial crisis of 2008/09, due to unconventional policies and given the level of the current federal funds target. In addition, I check for possible non-linearities due to the sign of the surprise as well as for the effects of rounding.

The first three columns highlight that the effects are weaker at the ZLB. At the ZLB, a positive surprise actually lowers inflation expectations. The same is true for the pe-riod of the financial crisis. Given these two pepe-riods partially overlap, this is plausible.

However, the fact that at the ZLB information effects are less relevant seems some-what surprising. This may partially be due to many different types of announcements falling into this period. Column (3) highlights that meetings with a quantitative easing (QE) announcement have very different effects compared to meetings with a forward guidance announcement (dates from Swanson 2017). In particular, forward guidance announcements have much stronger information effects. Given that most Fed forward guidance announcements can be considered Delphic (see e.g., Moessner, Jansen, and de Haan 2017), this is not surprising. Delphic forward guidance announcements reveal additional information about the future and therefore lead to positive co-movement of monetary policy and inflation expectations (Campbell et al. 2012). Beyond the simple dummy indicator for the ZLB, one can also control for the level of the federal funds rate in general. In column (4), the current fed funds target level and as well as an inter-action between the fed funds target and the monetary policy surprise are included.²⁰ These results show that generally a lower fed funds target is associated with slightly lower inflation expectations while the reaction to the surprise is stronger the lower the

20For the period in which the Fed is using a target range, the midpoint of the range is used.

Table 2.3: Financial crisis, unconventional policy and state dependence Dependent variable: inflation expectations int

(1) (2) (3) (4) (5) (6)

ZLB Fin. crisis QE+FG State dep. Sign Rounding FF surprise,t-1 1.14** 1.51*** 1.04** 4.68*** 0.80 1.81***

(0.51) (0.57) (0.50) (1.34) (0.64) (0.53)

ZLB× -6.30**

FF surprise,t-1 (2.56)

GFC× -3.21*

FF surprise,t-1 (1.79)

Post GFC× -0.63

FF surprise,t-1 (2.45)

QE× -15.07*

FF surprise,t-1 (9.05)

Forward Guidance× 22.08***

FF surprise,t-1 (7.83)

FF target,t-1× -0.95***

FF surprise,t-1 (0.31)

FF target,t-1 -0.03***

(0.01)

Pos. FF surprise× 0.71

FF surprise,t-1 (1.27)

Exp. multiple of 5× -1.94*

FF surprise,t-1 (1.05)

Gas price 0.04*** 0.04*** 0.04*** 0.04*** 0.04*** 0.04***

inflation,t (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Food price 0.62*** 0.63*** 0.62*** 0.66*** 0.62*** 0.63***

inflation,t (0.06) (0.06) (0.06) (0.06) (0.06) (0.06)

Observations 86988 86988 86988 86988 86988 86988

Households 43494 43494 43494 43494 43494 43494

Within R² 0.01 0.01 0.01 0.01 0.01 0.01

Notes: FF surprise: surprise change in the 3-month federal funds future around FOMC meetings.

Inflation expectations are from the Michigan Survey of Consumers, and refer to the next 12 months. Realized inflation is measured as the month-on-month change in the price level for food and gasoline products, respectively. ZLB: 12/2008-11/2015. GFC = great financial crisis:

01/2008-06/2009. QE and FG dates from Swanson (2017). Cluster-adjusted robust standard errors in parentheses. * p<0.1, **p<0.05, ***p<0.01.

target. The coefficients imply that at the ZLB with a target of 0.125%,²¹ a one standard deviation monetary policy surprise leads to a 0.23 percentage point increase in infla-tion expectainfla-tions, compared to an increase of only 0.09 percentage points at a target

21The midpoint of the 0-0.25% range the Fed used at ZLB.

CHAPTER 2. MONETARYPOLICY AND HOUSEHOLDEXPECTATIONS 66

level of 3%.²²

Finally, Table 2.3 explores two additional non-linearities. Column (5) shows that the sign of the surprise does not lead to significantly different effects. Column (6) shows that households who report a multiple of five as their inflation expectation do not respond to the monetary policy surprise (the sum of the two coefficients is not sig-nificantly different from zero). Reporting a multiple of five is considered to indicate a high degree of uncertainty about the forecast (Binder 2017c). It is plausible that indi-viduals who are uncertain about their forecast are also indiindi-viduals who are not aware of monetary policy announcements or do not pay attention to them, and thus do not react to them.²³

An additional issue to consider is other economic news being released in the same month, which may be correlated with the surprise in monetary policy. While the small window around the meeting ensures that the interest rate surprise does not pick up any information beyond the one revealed by the central bank announcements, it is still possible that the surprise correlates with other economic news. One way to control for this is to include measures of other economic news surprises in the analysis explicitly (see e.g., Del Negro et al. 2012). Because data availability is limited on these data, I refer this additional check to the appendix. Table B.9 shows that the inclusion of other economic news does not affect results much. See Appendix B3 for details.

Im Dokument Expectations, returns and the macroeconomy (Seite 86-90)