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Working Paper
Market-Based Monetary Policy Uncertainty
This paper investigates the role of monetary policy uncertainty for the transmission of FOMC actions to financial markets using a novel model-free measure of uncertainty based on derivative prices. We document a systematic pattern in monetary policy uncertainty over the course of the FOMC meeting cycle: On FOMC announcement days uncertainty tends to decline substantially, indicating the resolution of policy uncertainty. This decline is then reversed over the first two weeks of the intermeeting FOMC cycle. Both the level and the changes in uncertainty play an important role for the ...
Working Paper
Assessing Central Bank Commitment to Inflation Targeting: Evidence from Financial Market Expectations in India
We propose a novel framework to gauge the credibility of central banks’ commitment to an inflation-targeting regime. Our framework combines survey data on macroeconomic forecasts with high-frequency financial market data to understand how inflation targeting makes economic agents change their perception about central bank decisions. Specifically, using the Reserve Bank of India’s adoption of inflation targeting in 2015 as a laboratory, we apply two different approaches to estimate a market-perceived monetary policy rule and analyze how it changed with the implementation of inflation ...
Journal Article
What are the odds? option-based forecasts of FOMC target changes
This article uses probability forecasts derived from options to assess evolving market uncertainty about Federal Reserve monetary policy actions in a variety of recent events and episodes. Options on federal funds futures contracts reveal a complete probability density function over possible Federal Reserve target rates, thus augmenting the expectations provided by federal funds futures contracts. Option-based forecasts are most useful when more than two federal funds target outcomes are plausible at an upcoming policy meeting.