Central Bank Information Shocks

Marek Jarociński and Peter Karadi

No 1193, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the impact of central bank announcements on asset prices and the macroeconomy. Central bank announcements simultaneously convey information about interest rate policy and the central bank's assessment on the economic outlook. The paper disentangles the surprises caused by policy shocks and information shocks using sign restrictions on high-frequency surprises in a Bayesian VAR on US data. It relies on information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive information shock raises both. The paper finds that information shocks constitute a non-negligible share of high-frequency surprises. A representative central bank information shock is akin to a temporary demand shock that monetary policy partly offsets. It still significantly increases the price level, and eases financial conditions, but has only a weakly positive impact on output. A monetary policy tightening purged from the impact of information shocks induces a flexible price-level decline with a persistent downturn and tighter financial conditions.

Date: 2017
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Related works:
Working Paper: Deconstructing Monetary Policy Surprises - The Role of Information Shocks (2018)
Working Paper: Deconstructing monetary policy surprises: the role of information shocks (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1193

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