Working Papers

2019-02 | June 2019

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Taking the Fed at its Word: A New Approach to Estimating Central Bank Objectives using Text Analysis

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We propose a new approach to estimating central bank objectives, including the implicit inflation target, that requires no priors on the underlying macroeconomic structure nor observation of monetary policy actions. Our approach entails directly estimating the Federal Open Market Committee's (FOMC) objective function from the tone used by participants at the internal meetings. The results challenge two key aspects of conventional wisdom regarding FOMC preferences. First, the FOMC had an implicit inflation target of approximately 1 1/2 percent on average over our baseline 2000 – 2013 sample period, which was below average realized inflation. Second, the FOMC's loss is monotonically decreasing in real economic activity. We show these two results are complementary within a simple New Keynesian model.

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Article Citation

Shapiro, Adam Hale, and Daniel Wilson. 2019. "Taking the Fed at its Word: A New Approach to Estimating Central Bank Objectives using Text Analysis," Federal Reserve Bank of San Francisco Working Paper 2019-02. Available at https://doi.org/10.24148/wp2019-02