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Monetary Policy Surprises, Central Bank Information Shocks, and Economic Activity in a Small Open Economy

Stefan Laséen ()

No 396, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: In this paper I study the effects of monetary policy on economic activity and asset prices in Sweden, separately identifying the effects of a conventional policy change from effects of new information about economic fundamentals. Recent research has shown that high-frequency changes in policy interest rate futures prices around central bank policy announcements might not only contain monetary policy shocks but also central bank information shocks. I add to this line of research by studying a case where the central bank, in contrast to many other central banks studied in this literature, is very open and transparent about the monetary policy decision and publishes a full set of forecasts including the interest rate at the same moment as the decision is revealed. I use this information to construct an informationally-robust instrument for monetary policy shocks as the component of high-frequency market surprises triggered by policy announcements that is orthogonal to both central bank’s economic projections, including policy rate projections, and to past market surprises. I also add sign restrictions on stock market changes around the announcement to separate structural monetary policy shock from central bank information shocks. In contrast to recent work for other countries, I do not find that separating monetary policy shocks from central bank information shocks is important to measure the effects of monetary policy in Sweden.

Keywords: Monetary Policy; External Instruments; Monetary Policy Surprises; Information Effect; Small Open Economy; Exchange Rate; Stock Prices; House Prices. (search for similar items in EconPapers)
JEL-codes: C32 C36 D83 E31 E43 E44 E52 E58 G14 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2020-10-01
New Economics Papers: this item is included in nep-cba and nep-mon
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