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Monetary News Shocks

Nadav Ben Zeev (), Christopher Gunn () and Hashmat Khan ()

No 15-02, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We pursue a novel 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 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 hump-shaped 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.

Keywords: monetary news shocks; monetary policy residual; federal funds rate; forward guidance; new keynesian DSGE models (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2015-03-17, Revised 2017-02-17
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Published: Carleton Economic Papers

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Persistent link: https://EconPapers.repec.org/RePEc:car:carecp:15-02

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