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A New Measure of Monetary Policy Shocks

Xu Zhang

Staff Working Papers from Bank of Canada

Abstract: Combining the high-frequency multidimensional approach of Gürkaynak et al. (2005) with Greenbook measures of the Federal Reserve’s information set as in Romer and Romer (2004), I propose a new method of constructing a monetary policy shock that occurs on Federal Reserve announcement days. I provide substantial evidence that the new monetary policy shock is consistent with the predictions of workhorse macroeconomic models for structural monetary policy shocks. The new shock has large and highly statistically significant instantaneous effects on the Treasury yield curve. Using the shock as an external instrument in a VAR analysis, I find that contractionary monetary policy has modest downward effects on both output and inflation over business-cycle frequencies.

Keywords: Business fluctuations and cycles; Central bank research; Econometric and statistical methods; Interest rates; Monetary policy (search for similar items in EconPapers)
JEL-codes: E5 G0 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021-06
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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