May 2, 2022, Paper: "We estimate time-varying perceptions about the Fed’s monetary policy rule from crosssectional survey data and document systematic shifts in the perceived rule that are relevant for monetary policy and asset pricing. First, the perceived reaction coefficient to the output gap varies over the monetary policy cycle, with a pattern of quick and surprising rate cuts but gradual and data-dependent tightening. Second, this variation in the perceived rule explains changes in the sensitivity of interest rates to macroeconomic announcements. Third, high-frequency monetary policy surprises lead to updates in beliefs about the policy rule that depend on the state of the economy in the direction that is consistent with rational learning. Fourth, when monetary policy is perceived to be more responsive to real activity, risk premia on long-term Treasury bonds are low, consistent with standard asset pricing logic. Our findings can help explain certain empirical puzzles, such as systematic forecast errors about short-term interest rates and the decoupling of long-term rates during conundrum episodes."
Non-HKS Harvard Faculty Website - Adi Sunderam