Identifying Monetary Policy Shocks Using the Central Bank’s Information Set

Ruediger Bachmann, Eric Sims () and Isabel Goedl Hanisch

No 16836, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We identify monetary policy shocks by exploiting variation in the central bank’s information set. To be specific, we use differences between nowcasts of the output gap and inflation with final, revised estimates of these series to isolate movements in the policy rate unrelated to economic conditions. We then compute the effects of a monetary policy shock on the aggregate economy using local projection methods. We find that a contractionary monetary policy shock has a limited negative effect on output but a persistent negative impact on prices. In contrast to alternative identification approaches, we do not observe a price puzzle when analyzing the period from 1987 to 2008. Further, we validate the identification approach in a simple New Keynesian model, augmented by the assumption that the central bank observes the ingredients of the Taylor rule with error.

Keywords: Identification; Nowcasts; Monetary policy shocks; Local projections (search for similar items in EconPapers)
JEL-codes: E31 E50 E52 E58 (search for similar items in EconPapers)
Date: 2021-12
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