Monetary Policy Surprises with Imperfect Information

Marek Jarocinski and Peter Karadi

No 19923, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: High-frequency interest rate surprises around Fed announcements do not identify monetary policy (MP) shocks if markets are imperfectly informed. Instead, they can also reflect central bank information (CBI) shocks, when the Fed assesses the economy differently, and Fed-response-to-news (FRN) shocks, when markets misperceive the policy rule. The literature treats these as competing explanations; we show they are distinct, and jointly identify all three from the co-movement of interest rate and equity surprises, their predictability from public news, and heteroskedasticity between FOMC and non-FOMC communication. CBI effects are robust at daily and monthly frequencies; FRN matters only daily. Purging both strengthens monetary policy estimates.

Keywords: Monetary policy shocks; High-frequency identification; Local projection; Structural vector autoregressions; Fed chair speeches (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-mac and nep-mon
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