A New Monetary Policy Shock with Text Analysis

Measures of monetary shocks commonly give rise to the puzzling result where a monetary tightening has an expansionary effect. A possible reason is that agents may believe that monetary shocks contain information regarding the central bank's assessment of the economic environment (Nakamura and Steinsson, 2018). Under this hypothesis, the estimated response to monetary policy shocks would contain two conflating effects: the actual effect of monetary policy and the reaction of private agents to the newly acquired information. This paper overcomes this problem by extracting a novel series of monetary shocks using text analysis methods on central bank documents. The resulting text-based variables contain the informational content from changes in the policy rate. Thus, they can be used to extract exogenous changes in monetary policy that are orthogonal to any central bank information. Using this information-free measure of monetary policy shocks reveals that a monetary tightening is not expansionary, even when estimated on more recent periods.