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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
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Handle: RePEc:ptu:wpaper:w201307
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  1. Eric M. Leeper & Alexander W. Richter & Todd B. Walker, 2012. "Quantitative Effects of Fiscal Foresight," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 115-44, May.
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  4. Nikolay Iskrev, 2010. "Evaluating the strength of identification in DSGE models. An a priori approach," Working Papers w201032, Banco de Portugal, Economics and Research Department.
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  14. Den Haan, Wouter & Kaltenbrunner, Georg, 2007. "Anticipated Growth and Business Cycles in Matching Models," CEPR Discussion Papers 6063, C.E.P.R. Discussion Papers.
  15. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2008. "Investment Shocks and Business Cycles," CEPR Discussion Papers 6739, C.E.P.R. Discussion Papers.
  16. Karel Mertens & Morten O. Ravn, 2012. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated US Tax Policy Shocks," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 145-81, May.
  17. Nikolay Iskrev, 2009. "Local Identification in DSGE Models," Working Papers w200907, Banco de Portugal, Economics and Research Department.
  18. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
  19. 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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