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What Are Empirical Monetary Policy Shocks? Estimating the Term Structure of Policy News

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Abstract

Empirical monetary policy shocks (EMPS) mix information about both current and future policy. Policy news shocks at different horizons have different macroeconomic effects, so quantifying this mix is essential to use EMPS to evaluate theory. To disentangle these shocks, we develop an IV method to estimate the term structure of monetary policy news, which captures how an EMPS affects policy residuals at each future horizon. Applying our method to popular monetary policy shocks, we learn that they do not represent textbook surprises Instead, they mix information about policy at many horizons, and this mix varies depending on how the EMPS is identified. We can use the estimated term structures to construct synthetic shocks with arbitrary term structures and assess their macroeconomic effects. Synthetic surprise interest rate hikes are contractionary with little effect on prices, while long-term forward guidance is deflationary.

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  • Jonathan Adams & Philip Barrett, 2025. "What Are Empirical Monetary Policy Shocks? Estimating the Term Structure of Policy News," Research Working Paper RWP 25-06, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:101723
    DOI: 10.18651/RWP2025-06
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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