Board of Governors of the Federal Reserve System

June 2019 (Revised June 2019)

A Unified Measure of Fed Monetary Policy Shocks

Chunya Bu, John Rogers, and Wenbin Wu

Abstract:

Identification of Fed monetary policy shocks is complex, in light of the distinct policymaking regimes before, during, and after the ZLB period of December 2008 to December 2015. We develop a heteroscedasticity-based partial least squares approach, combined with Fama-MacBeth style cross-section regressions, to identify a US monetary policy shock series that usefully bridges periods of conventional and unconventional policymaking and is effectively devoid of the central bank information effect. Our series has moderately high correlation with well-known shocks in the literature, but has crucially important differences. Following conventional tests, we find scant evidence of the information effect in our measure. We attribute the source of these different findings to our econometric procedure and our use of the full maturity spectrum of interest rate instruments in constructing our measure. We then present evidence confirming an hypothesis in the literature that the information effect can lead to the result that shocks to monetary policy have transmission effects with signs that differ from traditional theory. We find that shocks to series that are devoid of (embody) the information effect display conventionally-signed (perverse) impulse responses of output and inflation. This provides evidence of first-order importance to staff at central banks undertaking quantitative theoretical modeling of the effects of monetary policy.

BRW shock series (CSV) and BRW shock series definitions (TXT) (Updated: March 4, 2021)

Accessible materials (.zip)

Original paper: PDF

DOI: https://doi.org/10.17016/FEDS.2019.043r1

PDF: Full Paper