A Unified Measure of Fed Monetary Policy Shocks

55 Pages Posted: 25 Jul 2019 Last revised: 21 Oct 2019

See all articles by Chunya Bu

Chunya Bu

University of Rochester

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Wenbin Wu

Fudan University

Date Written: 2019-06-07


Identification of Fed monetary policy shocks is complex, in light of the distinct policymaking regimes before, during, and after the ZLB period of December 2008 to December 2015. We develop a heteroscedasticity-based partial least squares approach, combined with Fama-MacBeth style cross-section regressions, to identify a US monetary policy shock series that usefully bridges periods of conventional and unconventional policymaking and is effectively devoid of the central bank information effect. Our series has moderately high correlation with the shocks identified by Nakamura and Steinsson (2018), Swanson (2018), and Jarocinski and Karadi (2018), but has crucially important differences. Following both the Nakamura-Steinsson and Jarocinski-Karadi empirical tests, we find scant evidence of the information effect in our measure. We attribute the source of these different findings to our econometric procedure and our use of the full maturity spectrum of interest rate instrume nts in constructing our measure. We then present evidence confirming an hypothesis in the literature that the information effect can lead to the result that shocks to monetary policy have transmission effects with signs that differ from traditional theory. We find that shocks to series that are devoid of (embody) the information effect display conventionally-signed (perverse) impulse responses of output and inflation. This provides evidence of first-order importance to staff at central banks undertaking quantitative theoretical modeling of the effects of monetary policy.

Keywords: Federal Reserve Board And Federal Reserve System, Information Effect

JEL Classification: E4, E5

Suggested Citation

Bu, Chunya and Rogers, John H. and Wu, Wenbin, A Unified Measure of Fed Monetary Policy Shocks (2019-06-07). FEDS Working Paper No. 2019-043, Available at SSRN: https://ssrn.com/abstract=3423249 or http://dx.doi.org/10.17016/FEDS.2019.043

Chunya Bu (Contact Author)

University of Rochester

300 Crittenden Blvd.
Rochester, NY 14627
United States

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Wenbin Wu

Fudan University

Beijing West District Baiyun Load 10th
Shanghai, 100045

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