Monetary News Shocks |
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Authors: | NADAV BEN ZEEV CHRISTOPHER GUNN HASHMAT KHAN |
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Institution: | E-mail: nadavbz@bgu.ac.il, hashmat.khan@carleton.cam, chris.gunn@carleton.ca |
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Abstract: | We pursue an 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 vector autoregression (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 persistent 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. |
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Keywords: | E32 E52 E58 monetary news shocks monetary policy residual federal funds rate forward guidance DSGE models |
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