The Main Monetary Policy Shock

We propose a novel procedure to identify a main monetary policy (MMP) shock as the linear combination of monetary policy surprises that best explains macroeconomic fluctuations. Implemented with two standard high-frequency yield-curve surprises and the Boehm and Kroner (2024) non-yield shock, the MMP shock explains nontrivial business-cycle variation over the last 30 years, in contrast with prior findings. Moreover, the MMP shock differs markedly from a textbook monetary policy shock: a contractionary shock leaves interest rates mostly unchanged but persistently lowers headline prices and appreciates the dollar, while temporarily tightening financial conditions and depressing industrial production.