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Unsurprising Shocks: Information, Premia, and the Monetary Transmission

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  • Silvia Miranda-Agrippino

    (Bank of England
    Centre for Macroeconomics (CFM))

Abstract

The use of narrow time frames to measure monetary policy surprises using interest rate futures is potentially not sufficient to guarantee their exogeneity as proxies for monetary policy shocks. Raw monetary “surprises" are, in fact, predictable. These findings are interpreted as suggesting that time-varying risk premia and news shocks are likely to be captured in the measurement. The resulting violation of the identifying assumptions in Proxy SVARs induces non-trivial distortions in the estimation of the contemporaneous transmission coefficients: consequences for the estimation of structural IRFs can be dramatic, both qualitatively and quantitatively. This paper analyses the informational content of monetary surprises and proposes a new method to construct futures-based external instruments that conditions on both central banks' and market participants' information sets. Identification of monetary policy shocks via the orthogonal proxies is shown to retrieve contemporaneous transmission coefficients that are in line with macroeconomic theory even in small, potentially informationally insufficient VARs.

Suggested Citation

  • Silvia Miranda-Agrippino, 2015. "Unsurprising Shocks: Information, Premia, and the Monetary Transmission," Discussion Papers 1613, Centre for Macroeconomics (CFM), revised Apr 2016.
  • Handle: RePEc:cfm:wpaper:1613
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    More about this item

    Keywords

    Monetary Surprises; Identification with External Instruments; Monetary Policy; Expectations; Information Asymmetries; Event Study; Proxy SVAR;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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