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.

DSGE models, E32, E52, E58, federal funds rate, forward guidance, monetary news shocks, monetary policy residual
Journal of Money, Credit and Banking
Department of Economics

Ben Zeev, N. (Nadav), Gunn, C, & Khan, H.U. (2019). Monetary News Shocks. Journal of Money, Credit and Banking. doi:10.1111/jmcb.12686