We pursue a novel 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 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 hump-shaped 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. Key words: Monetary News Shocks, Monetary Policy Residual, Federal Funds Rate, Forward Guidance, New Keynesian DSGE Models

Additional Metadata
Keywords Monetary News Shocks, Monetary Policy Residual, Federal Funds Rate, Forward Guidance, New Keynesian DSGE Models
Publisher Department of Economics
Series Carleton Economic Papers
Citation
Ben Zeev, N., Gunn, C, & Khan, H.U. (2015). Monetary News Shocks (No. CEP 15-02). Carleton Economic Papers. Department of Economics.