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 language | English |
|---|---|
| Pages (from-to) | 1793-1820 |
| Number of pages | 28 |
| Journal | Journal of Money, Credit and Banking |
| Volume | 52 |
| Issue number | 7 |
| DOIs | |
| State | Published - 1 Oct 2020 |
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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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