Working Paper: CEPR ID: DP12765
Authors: Peter Karadi; Marek Jarocinski
Abstract: Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression estimated on both US and euro area data. It relies on the information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy non-neutrality. We make this point formally and offer an interpretation of the central bank information shock using a New Keynesian macroeconomic model with financial frictions.
Keywords: Central Bank; Private Information; Monetary Policy Shock; High-Frequency Identification; Structural VAR
JEL Codes: E32; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| surprise tightening of monetary policy (E52) | increase in interest rates (E43) |
| surprise tightening of monetary policy (E52) | decrease in stock prices (G10) |
| positive central bank information shock (E58) | increase in interest rates (E43) |
| positive central bank information shock (E58) | increase in stock prices (G10) |
| negative comovement (interest rate increase and stock price decrease) (E43) | output contraction (E32) |
| positive comovement (interest rate increase and stock price increase) (E44) | higher price levels (E30) |
| positive comovement (interest rate increase and stock price increase) (E44) | improved financial conditions (G59) |