DP19923 Disentangling Monetary Policy, Central Bank Information, and Fed Response to News Shocks
This paper identifies three distinct components of high-frequency surprises around FOMC and non-FOMC Fed announcements: (a) a monetary policy shock, (b) a central bank information (CBI) shock, reflecting differences between market and Fed assessments of the economy, and (c) a Fed response to news (FRN) shock, reflecting market misperceptions of the Fed’s policy rule. Identification is achieved by leveraging (i) the high-frequency co-movement of interest rate and stock price surprises, (ii) the predictability of surprises based on public news, and (iii) heteroskedasticity between FOMC and non-FOMC announcements. The paper estimates the dynamic effects of these shocks using daily local projections and a monthly Bayesian VAR. Results confirm the robust presence of the CBI shock. The FRN shock plays a role in daily data but has little impact at the monthly level. The monetary policy shock, purified of CBI and FRN influences, generates impulse responses in line with theoretical predictions.
