Understanding the Effects of Unanticipated Future Monetary Policy Shocks

This paper studies the effects of future monetary policy shocks unanticipated by private agents using an estimated new Keynesian dynamic stochastic general equilibrium model framework. Analysis of U.S. data from 1967 Q1 to 2008 Q1 shows that the information structure on monetary policy substantially improves the model's fit to data compared to the conventional contemporaneous-shocks-only counterpart. To examine the role of agents' foresight about future monetary policy shocks, a counterfactual analysis on agents' information flows is conducted. If, throughout the sample period, agents had possessed perfect foresight about future monetary policy shocks, the business cycle fluctuations would have been milder as the volatility of key macroeconomic variables drops markedly. In addition, we find that the model-implied uncertainty about future monetary policy contains significant explanatory power for disagreement—cross-sectional dispersion of forecasts—in the Survey of Professional Forecasters.