Monetary News Shocks

Nadav Ben Zeev, Christopher Gunn, Hashmat Khan

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

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.

Original languageEnglish
Pages (from-to)1793-1820
Number of pages28
JournalJournal of Money, Credit and Banking
Volume52
Issue number7
DOIs
StatePublished - 1 Oct 2020

Keywords

  • DSGE models
  • E32
  • E52
  • E58
  • federal funds rate
  • forward guidance
  • monetary news shocks
  • monetary policy residual

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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