A Reassessment of Monetary Policy Surprises and High-Frequency Identification

67 Pages Posted: 18 Apr 2022 Last revised: 21 Apr 2024

See all articles by Michael Bauer

Michael Bauer

Federal Reserve Bank of San Francisco

Eric T. Swanson

University of California, Irvine - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2022

Abstract

High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. We address these concerns in two ways: First, we expand the set of monetary policy announcements to include speeches by the Fed Chair, which doubles the number and importance of announcements; Second, we explain the predictability of the monetary policy surprises in terms of the “Fed response to news” channel of Bauer and Swanson (2021) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data that pre-date the announcement. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on asset prices are largely unchanged; Second, estimates of the effects on the macroeconomy are substantially larger and more significant than what previous studies using high-frequency data have typically found.

Suggested Citation

Bauer, Michael and Swanson, Eric T., A Reassessment of Monetary Policy Surprises and High-Frequency Identification (April 2022). NBER Working Paper No. w29939, Available at SSRN: https://ssrn.com/abstract=4086229

Michael Bauer (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Eric T. Swanson

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
3151 Social Science Plaza
Irvine, CA 92697-5100
United States
(949) 824-8305 (Phone)

HOME PAGE: http://www.ericswanson.org

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