Enhanced transparency of the Federal Reserve: Impact on federal funds rate forecast errors.
详细信息
文摘
The Federal Open Market Committee (FOMC) made an institutional change in December 2004 when it began releasing the minutes of its meetings with a three-week delay instead of the previous five-to-eight-week lag. This decision to make the meeting minutes public earlier provides the market with timely information about the context of the minutes. Now, the meeting minutes are made public before the next FOMC meeting, whereas in the past the minutes were not made public until after the next FOMC meeting. The decision to make the minutes public sooner is considered a step toward greater transparency by the Federal Reserve. Transparency is associated with clear rules and procedures, and it is argued that a lack of secrecy in conducting monetary policy eliminates market uncertainties and, thus, increases economic efficiency. The trend toward increased transparency in conducting monetary policy has been a result of deregulation in the financial environment and a greater consideration of the market's expectations in successful monetary policy.;This thesis examines whether this change in the Federal Reserve's transparency decreased forecast error variance for the federal funds rate after December 2004. In modeling the federal funds rate by using real-time data, the Taylor rule was initially explored, but subsequently was abandoned due to insignificant coefficients and a lack of robustness in results. Instead, a Box-Jenkins method is chosen as the model and forecast errors are examined from 2001 to 2007. The forecast errors exhibit a decreasing trend after the institutional change in transparency. Forecast errors are formally tested for pre- and post-transparency period with an F-test, under the assumption that these two samples for forecast error variances are independent. The results indicate an empirical finding that the decision of the FOMC to move up the publication of the minutes to three weeks after the meeting is significant because it provides timely information. In other words, there is information in the model that reduces uncertainty and makes the process less stochastic.