Data Revisions and the Identification of Monetary Policy Shocks

Abstract

Monetary policy research using time series methods has been criticized for using more information that the Federal Reserve had available in setting policy. To quantify the role of this criticism, we propose a method to estimate a VAR with real-time data while accounting for the latent nature of many economic variables, such as output. Our estimated monetary policy shocks are closely correlated with a typically estimated measure. The impulse response functions are broadly similar across the methods. Our evidence suggest that the use of revised data in VAR analyses or monetary policy shocks may be a serious limitation.