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Monetary policy shocks: We got news!

  • Sandra Gomes
  • Nikolay Iskrev
  • Caterina Mendicino

We augment a medium-scale DSGE model with monetary policy news shocks and t it to US data. Monetary policy news shocks improve the performance of the model both in terms of marginal data density and in terms of its ability to match the empirical moments of the variables used as observables. We estimate several versions of the model and nd that the one with news shocks over a two-quarter horizon dominates in terms of overall goodness of t. We show that, in the estimated model: (1) adding monetary policy news shocks to the model does not lead to identi cation problems; (2) monetary policy news shocks account for a larger fraction of the unconditional variance of the observables than the standard unanticipated monetary policy shock; (3) these news shocks also help to achieve a better matching of the covariances of consumption growth and the interest rate.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201307.

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Date of creation: 2013
Handle: RePEc:ptu:wpaper:w201307
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  1. Hashmat Khan & John Tsoukalas, 2009. "The Quantitative Importance of News Shocks in Estimated DSGE Models," Carleton Economic Papers 09-07, Carleton University, Department of Economics, revised 22 May 2012.
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  16. André Kurmann & Christopher Otrok, 2010. "News Shocks and the Slope of the Term Structure of Interest Rates," Cahiers de recherche 1005, CIRPEE.
  17. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Slow recoveries: A structural interpretation," Economics Working Papers 1317, Department of Economics and Business, Universitat Pompeu Fabra.
  18. Stephane Auray & Paul Gomme & Shen Guo, 2009. "Nominal Rigidities, Monetary Policy and Pigou Cycles," Working Papers 09005, Concordia University, Department of Economics, revised 06 Apr 2010.
  19. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
  20. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
  21. Flodén, Martin, 2007. "Vintage Capital and Expectations Driven Business Cycles," CEPR Discussion Papers 6113, C.E.P.R. Discussion Papers.
  22. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
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