We pursue an empirical strategy to identify a monetary news shock in the U.S. economy. We use a monetary policy residual, along with other variables in a vector autoregression (VAR), and identify a monetary news shock as the linear combination of reduced-form innovations that is orthogonal to the current residual and that maximizes the sum of contributions to its forecast error variance over a finite horizon. Real GDP declines in a persistent manner after a positive monetary news shock. This contraction in economic activity is accompanied by a fall in inflation and a rapid increase in the nominal interest rate.

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Keywords DSGE models, E32, E52, E58, federal funds rate, forward guidance, monetary news shocks, monetary policy residual
Persistent URL dx.doi.org/10.1111/jmcb.12686
Journal Journal of Money, Credit and Banking
Ben Zeev, N. (Nadav), Gunn, C, & Khan, H.U. (2019). Monetary News Shocks. Journal of Money, Credit and Banking. doi:10.1111/jmcb.12686