Working Paper: NBER ID: w29572
Authors: Ruediger Bachmann; Isabel Gdlhanisch; Eric R. Sims
Abstract: We identify monetary policy shocks by exploiting variation in the central bank’s information set. To be specific, we use differences between nowcasts of the output gap and inflation with final, revised estimates of these series to isolate movements in the policy rate unrelated to economic conditions. We then compute the effects of a monetary policy shock on the aggregate economy using local projection methods. We find that a contractionary monetary policy shock has a limited negative effect on output but a persistent negative impact on prices. In contrast to alternative identification approaches, we do not observe a price puzzle when analyzing the period from 1987 to 2008. Further, we validate the identification approach in a simple New Keynesian model, augmented by the assumption that the central bank observes the ingredients of the Taylor rule with error.
Keywords: Monetary Policy; Nowcasts; Economic Shocks
JEL Codes: E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nowcast errors (C53) | monetary policy interest rate (E52) |
| contractionary monetary policy shock (E49) | output (C67) |
| contractionary monetary policy shock (E49) | prices (P22) |
| monetary policy interest rate (E52) | output (C67) |
| monetary policy interest rate (E52) | prices (P22) |