1. Discussion of Nakamura and Steinsson’s “High Frequency Identification of Monetary Non-Neutrality” ASSA Meetings, Boston January 3, 2015 Eric T. Swanson University of California, Irvine

2. What the Paper Does 1. Estimates impulse response functions of interest rates and inflation to an exogenous monetary policy shock. 2. Uses these impulse responses to estimate parameters of the CEE model by matching model impulse responses to empirical impulse responses. Main contribution: Effects of monetary policy shocks are identified using modern methods: high-frequency data heteroskedasticity (as in Rigobon 2003 REStat)

3. Identifying Effects of Monetary Policy Shocks Canonical problem in empirical macro/monetary economics: separate exogenous changes in monetary policy from endogenous responses of monetary policy to the economy. Modern approach: use daily or intra-daily data on days of FOMC announcements (Kuttner 2001 JME; Gurkaynak, Sack, Swanson 2005 AER, 2005 IJCB)

4. source: Gurkaynak, Sack, Swanson (2005 IJCB) Identifying Effects of Monetary Policy Shocks

5. Canonical problem in empirical macro/monetary economics: separate exogenous changes in monetary policy from endogenous responses of monetary policy to the economy. Modern approach: use daily or intra-daily data on days of FOMC announcements (Kuttner 2001 JME; Gurkaynak, Sack, Swanson 2005 AER, 2005 IJCB) Caveat: some intermeeting FOMC announcements occurred in response to weak employment reports, so daily data can be endogenous.

6. source: Gurkaynak, Sack, Swanson (2005 IJCB) Identifying Effects of Monetary Policy Shocks

7. Canonical problem in empirical macro/monetary economics: separate exogenous changes in monetary policy from endogenous responses of monetary policy to the economy. Modern approach: use daily or intra-daily data on days of FOMC announcements (Kuttner 2001 JME; Gurkaynak, Sack, Swanson 2005 AER, 2005 IJCB) Caveat: some intermeeting FOMC announcements occurred in response to weak employment reports, so daily data can be endogenous. Potential endogeneity problem is even greater for two-day event windows (Gagnon, Raskin, Remache, Sack 2011 IJCB, Hanson and Stein 2012 FRBWP)

8. Identifying Effects of Monetary Policy Shocks Two solutions to identification problem: intraday (tick) data identificaton through heteroskedasticity (Rigobon 2003 REStat; Rigobon and Sack 2003 QJE, 2004 JME) Nakamura and Steinsson use both of these methods. However, there’s no incremental benefit to the heteroskedasticity identification, once you have tick data. In fact, heteroskedasticity-based formulas could contaminate the estimates if non-FOMC homoskedasticity assumption is violated.

9. Identifying Effects of Monetary Policy Shocks Unconditional Volatility of 6-month T-bill Yield, 1990-2013

10. Identifying Effects of Monetary Policy Shocks Two solutions to identification problem: intraday (tick) data identificaton through heteroskedasticity (Rigobon 2003 REStat; Rigobon and Sack 2003 QJE, 2004 JME) Nakamura and Steinsson use both of these methods. However, there’s no incremental benefit to the heteroskedasticity identification, once you have tick data. In fact, heteroskedasticity-based formulas could contaminate the estimates if non-FOMC homoskedasticity assumption is violated. Comment #1: Marginal benefit of heteroskedasticity identification seems very low, given tick data.

11. One-Dimensional Monetary Policy? Traditionally (Kuttner 2001 JME; Gurkaynak, Sack, Swanson 2005 AER) change in monetary policy = change in fed funds rate More recent literature (Gurkaynak, Sack, Swanson 2005 IJCB) recognizes that monetary policy has two dimensions: changes in federal funds rate changes in forward guidance Nakamura and Steinsson take one-dimensional approach, but change in monetary policy ≠ change in fed funds rate change in monetary policy ≠ change in forward guidance Instead, change in monetary policy is some unspecified average combination of the two.

12. One-Dimensional Monetary Policy? source: Gurkaynak, Sack, and Swanson (2005 IJCB)

13. One-Dimensional Monetary Policy? Empirically, changes in fed funds rate and changes in forward guidance have different effects. In DSGE models, changes in fed funds rate and changes in forward guidance also have different effects contemporaneous shock vs. news shock In Nakamura and Steinsson’s DSGE model, monetary policy shocks are modeled in the traditional way—as a contemporaneous shock to the federal funds rate. Comment #2: There’s a mismatch between the empirical impulse responses and the model’s impulse responses they are conceptually not the same type of shock model parameter estimates may be biased.

14. Risk Premia

15. There’s some evidence that risk premia for very short-term yields are small and relatively stable at daily frequency (Piazzesi and Swanson 2008 JME) But for longer-term bonds, risk premia are larger on average and more volatile over time. Nakamura and Steinsson consider some robustness checks: Blue Chip forecasts affine term structure model longer event-study windows They conclude that the Expectations Hypothesis holds around FOMC announcements. Comment #3: Does the EH hold around FOMC (and/or other major macroeconomic) announcements?

16. Summary of Comments 1.Given tick data, no need for heteroskedasticity-based identification in fact, heteroskedasticity adjustment may contaminate estimates 2.Assumption of one-dimensional monetary policy is problematic empirical estimates are for an unspecified average of changes in fed funds rate and forward guidance but monetary policy in DSGE model is modeled as a pure change in fed funds rate—not the same thing! 3.Does the Expectations Hypothesis hold around FOMC (and other major macroeconomic) announcements?