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The B.E. Journal of Macroeconomics

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Monetary policy and news shocks: are Taylor rules forward-looking?

Gabriela Best / Pavel Kapinos
  • Corresponding author
  • Division of Insurance and Research, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429, USA
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Published Online: 2016-02-09 | DOI: https://doi.org/10.1515/bejm-2014-0161


This paper extends a standard New Keynesian model by introducing anticipated shocks to inflation, output, and interest rates, and by incorporating forward-looking, forecast-targeting Taylor rules. The latter aspect is parsimoniously modeled through the presence of an expected future interest rate term in the Taylor rule that recent literature has found to be economically and statistically important in a variety of settings without anticipated shocks. Using Bayesian econometric methods, we find that the presence of anticipated shocks improves the model’s fit to the US data but substantially decreases the weight on future macroeconomic variables in the forward-looking Taylor rule. Our results suggest that, although communicating its intentions regarding future monetary policy conduct, as modeled by anticipated monetary shocks, plays an important role for the Fed, responding to its expectations of future macroeconomic conditions does not. Furthermore, we conduct extensive robustness checks with respect to modeling the forward-looking specification of the Taylor rule that confirm our baseline results.

Keywords: anticipated shocks; Calvo-type Taylor rule; forward guidance; New Keynesian model; monetary policy

JEL: E31; E32; E52


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About the article

Corresponding author: Pavel Kapinos, Division of Insurance and Research, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429, USA, Phone: +(202) 898-6587, e-mail: pkapinos@fdic.gov

Published Online: 2016-02-09

Published in Print: 2016-06-01

Citation Information: The B.E. Journal of Macroeconomics, Volume 16, Issue 2, Pages 335–360, ISSN (Online) 1935-1690, ISSN (Print) 2194-6116, DOI: https://doi.org/10.1515/bejm-2014-0161.

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