Deconstructing Monetary Policy Surprises— The Role of Information Shocks

Abstract

Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency co-movement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy nonneutrality. (JEL D83, E43, E44, E52, E58, G14)

Do Central Banks Respond Timely to Developments in the Global Economy?

“…general economic outlook. And, this is indeed what we find, although using a very different methodology than in Jarocinski and Karadi (2018). 22 In our setting, the information component interpretation is not only in line with our empirical estimates, but also makes intuitive sense.…”

“…Kuttner (2001); Romer and Romer (2004); Gürkaynak, Sack and Swanson (2005); Gertler and Karadi (2015); Jarocinski and Karadi (2018), among others. In particular, while Romer and Romer (2004) examined narrative records to infer the Federal Reserve's intentions for the federal funds rate around FOMC meetings, Kuttner (2001); Gürkaynak et al (2005); Gertler and Karadi (2015); Jarocinski and Karadi (2018) used high-frequency (financial) data to construct anticipated and unanticipated components of monetary policy. In contrast to some of these studies, however, we do not have to go via the narrative records of the future market to construct the central banks intentions (and the corresponding forecast errors), since we have access to the actual projected interest rate paths.…”

Decomposing the effects of monetary policy using an external instruments SVAR

“…4 In addition to the work of Campbell et al (2012) and Campbell, Fisher, Justiniano, and Melosi (2016), there is a growing literature that emphasizes the role of information frictions in the monetary transmission mechanism. Miranda-Agrippino and Ricco (2018) and Jarocinski and Karadi (2018) use a SVAR framework while Nakamura and Steinsson (2018), Cieslak and Schrimpf (2019), Lunsford (2018) and Andrade and Ferroni (2018) use a high frequency analysis to shed light on the importance of this information channel. Finally, Melosi (2016) and Tang (2015) provide some structural evidence.…”

How Did Unconventional Monetary Policy Affect Economic Forecasts?

“…The Federal Reserve's use of UMP after the 2008 financial crisis has produced much research on how UMP affected actual economic performance but little research on how it affected predictions of economic performance by professional economic forecasters. These predictions are important due to their influence on households' and firms' expectations and their potential to reveal information shocks of Fed announcements, an effect recently emphasized by Nakamura and Steinsson (2018) and Jarocinski and Karadi (2018). This paper examines how professional forecasters in the monthly WSJ survey revised their predictions of bond rates, real-GDP growth rates, and CPI inflation rates following Fed announcements of QE and its reversal, tapering (TAPER).…”