Central Bank Communication: Information and Policy Shocks
103 Pages Posted: 2 Jun 2020 Last revised: 3 Dec 2020
Date Written: May 22, 2020
Abstract
The study proposes a novel way to identify the effects of monetary policy shocks taking into account time-varying signals of the central bank. I augment the standard monetary policy Bayesian Vector Autoregression (BVAR) with additional information variables from Fed statements, which allows us to study the information-free effects of monetary policy shocks and to take into account forward-looking information released by the central bank. The results show that, compared to surprises in 3-month federal funds futures, the policy shock identified in this study has a more negative effect on GDP, a more prolonged negative effect on inflation, and a greater impact effect on the excess bond premium. In the short-run it causes S&P500 to decline and the Fed to raise its interest rate. Furthermore, the results of large-scale Bayesian VAR confirm the standard transmission channels of monetary policy.
Keywords: monetary policy, shock, transmission, statements, Latent Dirichlet Allocation, information
JEL Classification: E52, E31, E00
Suggested Citation: Suggested Citation