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Interest Rate Surprises: A Tale of Two Shocks

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Abstract

Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our results show that there is a prominent central bank information component in the widely used high-frequency policy rate surprise measure that needs to be parsed out. When we remove this central bank information component, the estimated effects of monetary policy shocks are more pronounced relative to those estimated using the entire policy rate surprise.

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  • Ricardo Nunes & Ali Ozdagli & Jenny Tang, 2022. "Interest Rate Surprises: A Tale of Two Shocks," Working Papers 22-2, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:93691
    DOI: 10.29412/res.wp.2022.02
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    Cited by:

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    2. Connor M. Brennan & Margaret M. Jacobson & Christian Matthes & Todd B. Walker, 2024. "Monetary Policy Shocks: Data or Methods?," Finance and Economics Discussion Series 2024-011, Board of Governors of the Federal Reserve System (U.S.).
    3. Felipe Beltrán, 2023. "Global monetary policy surprises and their transmission to emerging market economies: an external VAR analysis," Working Papers Central Bank of Chile 975, Central Bank of Chile.

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    More about this item

    Keywords

    monetary policy; central bank information; high-frequency identification; proxy structural VAR; external instruments;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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