Interest Rate Surprises: A Tale of Two Shocks

Abstract

Interest rate surprises around FOMC announcements contain both pure policy shocks and interest rate movements driven by central bank information about the economy. By analyzing interest rate changes on days of macroeconomic data releases, the impact of the central bank's information shocks can be identified and separated from the pure policy shocks. Results show that there is a significant central bank information component in the widely used policy rate surprise measure. Removing this component reveals that the contractionary effects of a positive pure policy shock are more pronounced relative to those estimated using the entire policy rate surprise. A positive information shock, on the other hand, is expansionary.

Keywords: Monetary policy, central bank information, high frequency identification, proxy structural VAR, exte

JEL Classification: C36, D83, E52, E58