Identification of Monetary Policy Shocks from FOMC Transcripts
58 Pages Posted: 11 Feb 2020 Last revised: 8 Sep 2020
Date Written: January 29, 2020
Abstract
I propose a new approach to identify exogenous monetary policy shocks that requires no priors on the underlying macroeconomic structure, nor any observation of monetary policy actions. My approach entails directly estimating the unexpected changes in the federal funds rate as those which cannot be predicted from the internal Federal Open Market Committee’s (FOMC) discussions. I employ basic machine learning regressors to predict the effective federal funds rate from the FOMC’s discussions without imposing any time-series structure. The result of the standard three variable Structural Vector Autoregression (SVAR) with my new measure shows that economic activity and inflation decline in response to a monetary policy shock. Moreover, the Fed’s deviation from a monetary policy rule in its interest rate settings leads to a decline in both economic activity and inflation.
Keywords: monetary policy, identification, shock, preferences
JEL Classification: E52, E31, E00
Suggested Citation: Suggested Citation