Essays on Central Bank Projections, Credibility, and Monetary Policy
In Chapter 1, I examine the impact of the forecasts released by the Federal Open Market Committee (FOMC) in the Summary of Economic Projections over the period of April 2011 through March 2019. I find that changes in the median FOMC federal funds rate forecast did impact asset prices, but forecasts of output and inflation did not have any effect, which may be surprising based on the literature regarding the ``Fed information effect'' channel. Further, the dispersion in the federal funds rate forecast does not affect asset prices though it does impact the degree of uncertainty regarding future monetary policy. Finally, I find that most of forward guidance can be summarized through the change in the median federal funds rate forecast for the end of the following year.
In Chapter 2, I document differences in interest rate expectations between central banks and the private sector and show why such a gap is a puzzle. I then create a measure of central bank credibility by taking the absolute value of the difference in expectations, which I use in an event study across several countries to demonstrate that a decrease in credibility can reduce the efficacy of forward guidance. I also offer several possible explanations for differences in interest rate expectations. In particular, I find that some of this gap must be attributed to differences in beliefs about the central bank's reaction function. In Chapter 3, I examine whether vacancies on the Board of Governors of the Federal Reserve are costly. I find little evidence to suggest that this is the case: monetary policy, uncertainty about the future path of interest rates, and the Board of Governor's ability to supervise and communicate are largely unaffected by the number of absences on the committee. I also show that this low cost has important implications for the nomination process from both the perspective of the president and the Senate.