Interest Rate Surprises: A Tale of Two Shocks

RePEc Short ID: poz96
ORCID iD: 0000-0001-7165-689X

Nunes, Ricardo; Ozdagli, Ali; Tang, Jenny

doi:10.24149/wp2213

Working Paper

Interest Rate Surprises: A Tale of Two Shocks

Abstract: Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our results show that there is a prominent central bank information component in the widely used high-frequency policy rate surprise measure. When we remove this central bank information component, the estimated effects of monetary policy shocks are more pronounced relative to those estimated using the entire policy rate surprise.

Keywords: Monetary policy; central bank information; high frequency identification; proxy structural VAR; external instruments;

JEL Classification: C36; D83; E52; E58;

https://doi.org/10.24149/wp2213