Unsurprising shocks: information, premia, and the monetary transmission

Silvia Miranda-Agrippino

No 626, Bank of England working papers from Bank of England

Abstract: Central banks’ decisions are a function of forecasts of macroeconomic fundamentals. Because private sector forecasts are not bound to be equal to central banks’ forecasts, what markets label as unexpected may or may not be unanticipated by the central bank. Monetary surprises can thus incorporate anticipatory effects if market participants fail to correctly account for the systematic component of policy when they are surprised by an interest rate decision. Depending on how market participants perceive the policy decision, their economic projections and the associated risk compensations move in opposite directions, and do so at the time of the announcement. Hence, and regardless of the width of the measurement window, monetary surprises capture more than just the monetary policy shock, and their use as external instruments for identification is potentially compromised. Monetary ‘surprises’ are dependent on, and shown to be predictable by both central banks’ forecasts and past information available to market participants prior to the announcement. A New-Keynesian framework sketches the intuition. The resulting distortions in the estimated impulse response functions can be dramatic, both qualitatively and quantitatively. A new set of monetary surprises, free of anticipatory effects and unpredictable by past information, are shown to retrieve transmission coefficients to a monetary policy shock consistent with macroeconomic theory even in informationally deficient VARs.

Keywords: Monetary surprises; identification with external instruments; monetary policy; expectations; information asymmetries; event study; proxy SVAR (search for similar items in EconPapers)
JEL-codes: C36 E44 E52 G14 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2016-11-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (68)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... EAD43A740496BACDB409 Full text (application/pdf)

Related works:
Working Paper: Unsurprising Shocks: Information, Premia, and the Monetary Transmission (2016)
Working Paper: Unsurprising shocks: information, Premia, and the Monetary Transmission (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0626

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().