Deconstructing Monetary Policy Surprises: The Role of Information Shocks

64 Pages Posted: 1 Mar 2018

See all articles by Marek Jarocinski

Marek Jarocinski

European Central Bank (ECB)

Peter Karadi

European Central Bank (ECB) - Directorate General Research; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2018

Abstract

Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy non-neutrality. We make this point formally and offer an interpretation of the central bank information shock using a New Keynesian macroeconomic model with financial frictions.

Keywords: Central Bank Private Information, Monetary Policy Shock, High-Frequency Identification, Structural VAR, Event Study

JEL Classification: E32, E52, E58

Suggested Citation

Jarocinski, Marek and Karadi, Peter, Deconstructing Monetary Policy Surprises: The Role of Information Shocks (February 27, 2018). ECB Working Paper No. 2133, ISBN: 978-92-899-3238-7, Available at SSRN: https://ssrn.com/abstract=3131573 or http://dx.doi.org/10.2139/ssrn.3131573

Marek Jarocinski

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6414 (Phone)

Peter Karadi (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

HOME PAGE: http://sites.google.com/site/pkaradi696/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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