Identification of Monetary Policy Shocks from FOMC Transcripts

58 Pages Posted: 11 Feb 2020 Last revised: 8 Sep 2020

See all articles by Nataliia Ostapenko

Nataliia Ostapenko

University of Tartu - Department of Economics

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

Ostapenko, Nataliia, Identification of Monetary Policy Shocks from FOMC Transcripts (January 29, 2020). Available at SSRN: https://ssrn.com/abstract=3527415 or http://dx.doi.org/10.2139/ssrn.3527415

Nataliia Ostapenko (Contact Author)

University of Tartu - Department of Economics ( email )

Narva 4-A123
Tartu, 51009
Estonia

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