Working Paper: CEPR ID: DP13396
Authors: Silvia Miranda-Agrippino; Giovanni Ricco
Abstract: Commonly used instruments for the identification of monetary policy disturbances are likely to combine the true policy shock with information about the state of the economy due to the information disclosed through the policy action. We show that this signalling effect of monetary policy can give rise to the empirical puzzles reported in the literature, and propose a new high-frequency instrument for monetary policy shocks that accounts for informational rigidities. We find that a monetary tightening is unequivocally contractionary, with deterioration of domestic demand, labour and credit market conditions, as well as of asset prices and agents' expectations.
Keywords: Monetary Policy; Local Projections; VARs; Expectations; Information Rigidity; Survey Forecasts; External Instruments
JEL Codes: C11; C14; E52; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contractionary monetary policy shock (E49) | significant negative impacts on output (F69) |
| Contractionary monetary policy shock (E49) | significant negative impacts on prices (F69) |
| Contractionary monetary policy shock (E49) | significant negative impacts on employment (F66) |
| Monetary tightening (E52) | deterioration of domestic demand (D12) |
| Monetary tightening (E52) | deterioration of labor market conditions (F66) |
| Monetary tightening (E52) | deterioration of credit market conditions (E44) |
| Monetary tightening (E52) | deterioration of asset prices (G19) |
| Monetary tightening (E52) | decline in agents' expectations (D84) |
| Monetary policy shocks (E39) | stable effects on output and prices (E39) |