High Frequency Identification of Monetary Non-Neutrality

We present estimates of monetary non-neutrality based on evidence from high-frequency responses of nominal and real interest rates. Our identifying assumption is that unexpected changes in interest rates in a 30-minute window surrounding scheduled Federal Reserve announcements arises from news about monetary policy. At these times, nominal and real interest rates respond roughly one-for-one, several years out into the term structure, while the response of expected inflation is small. We use this evidence to estimate key parameters of a workhorse New Keynesian model. The implied degree of monetary non-neutrality is large. Moreover, we find evidence of a “Fed information effect”: FOMC announcements affect expectations not only about the evolution of monetary policy but also about future economic fundamentals.