Monetary News Shocks

Abstract

We pursue an empirical strategy to identify a monetary news shock in the U.S. economy. We use a monetary policy residual, along with other variables in a vector autoregression (VAR), and identify a monetary news shock as the linear combination of reduced‐form innovations that is orthogonal to the current residual and that maximizes the sum of contributions to its forecast error variance over a finite horizon. Real GDP declines in a persistent manner after a positive monetary news shock. This contraction in economic activity is accompanied by a fall in inflation and a rapid increase in the nominal interest rate.

The macroeconomic effects of forward communication

“…Although forward guidance seems to be effective in moving medium-to long-term interest rates at high frequencies, 4 the empirical evidence on its effectiveness in mov-ing key macroeconomic variables is still relatively scarce. Some exceptions are Andrade and Ferroni (2019), Smith and Becker (2015), Bundick andSmith (2018) andBen Zeev et al (2019). Andrade and Ferroni (2019) find that the ECB was successful in stimulating the economy when it was surprising the market with Odyssean signals of future policy accommodation.…”

News Shocks and the Effects of Monetary Policy

“…The current paper takes the first step to disentangle the unanticipated monetary shock from the endogenous response of monetary policy to the TFP news shock. Recent studies also highlight the importance of other news shocks identified with the maximum forecast error variance decomposition approach in the spirit of Barsky and Sims (2011), such as the risk news shock [Pinter et al (2013)], the fiscal news shock (Ben Zeev and Pappa (2017)), the monetary news shock [Kapinos (2011) andBen Zeev et al (2020)], and the investment-specific news shock [Ben Zeev and Khan (2015) and Ma (2018)]. The approach proposed in this paper provides a way to combine the zero restriction method with the maximum forecast error variance decomposition approach.…”

Forward Guidance and the State of the Economy

“…They find news shocks play an important role in matching data. Ben Zeev, Gunn, and Khan (2015) and Campbell et al (2012) develop methods to identify anticipated monetary policy shocks in the data. expectations, and they are only effective in periods when the expected policy rate is above zero.…”

“…They find news shocks play an important role in matching data. Ben Zeev, Gunn, and Khan () and Campbell et al () develop methods to identify anticipated monetary policy shocks in the data.…”