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Title: Identifying Monetary Policy Shocks Using the Central Bank's Information Set

Author(s): Rüdiger Bachmann, Isabel Hanisch and Eric Sims

Publication Date: December 2021

Keyword(s): identification, local projections, monetary policy shocks and nowcasts

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We identify monetary policy shocks by exploiting variation in the central bank's information set. To be specific, we use differences between nowcasts of the output gap and inflation with final, revised estimates of these series to isolate movements in the policy rate unrelated to economic conditions. We then compute the effects of a monetary policy shock on the aggregate economy using local projection methods. We find that a contractionary monetary policy shock has a limited negative effect on output but a persistent negative impact on prices. In contrast to alternative identification approaches, we do not observe a price puzzle when analyzing the period from 1987 to 2008. Further, we validate the identification approach in a simple New Keynesian model, augmented by the assumption that the central bank observes the ingredients of the Taylor rule with error.

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Bibliographic Reference

Bachmann, R, Hanisch, I and Sims, E. 2021. 'Identifying Monetary Policy Shocks Using the Central Bank's Information Set'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16836