Discussion paper

DP16836 Identifying Monetary Policy Shocks Using the Central Bank’s Information Set

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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Citation

Bachmann, R, E Sims and I Goedl Hanisch (eds) (2021), “DP16836 Identifying Monetary Policy Shocks Using the Central Bank’s Information Set”, CEPR Press Discussion Paper No. 16836. https://cepr.org/publications/dp16836