Identifying Monetary Policy Shocks Using the Central Bank's Information Set
We identify monetary policy shocks by exploiting variation in the central bank’s information set. To be specific, we use differences between nowcasts of the output gap and inflation with final, revised estimates of these series to isolate movements in the policy rate unrelated to economic conditions. We then compute the effects of a monetary policy shock on the aggregate economy using local projection methods. We find that a contractionary monetary policy shock has a limited negative effect on output but a persistent negative impact on prices. In contrast to alternative identification approaches, we do not observe a price puzzle when analyzing the period from 1987 to 2008. Further, we validate the identification approach in a simple New Keynesian model, augmented by the assumption that the central bank observes the ingredients of the Taylor rule with error.
We thank Max Goedl and seminar participants at Notre Dame for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Rüdiger Bachmann & Isabel Gödl-Hanisch & Eric R. Sims, 2022. "Identifying monetary policy shocks using the central bank’s information set," Journal of Economic Dynamics and Control, vol 145. citation courtesy of