Monetary News Shocks

Nadav Ben Zeev, Christopher Gunn and Hashmat Khan ()

Journal of Money, Credit and Banking, 2020, vol. 52, issue 7, 1793-1820

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.

Date: 2020
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https://doi.org/10.1111/jmcb.12686

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Working Paper: Monetary News Shocks (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:7:p:1793-1820

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