A Reassessment of Monetary Policy Surprises and High-Frequency Identification

Abstract

High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. We address these concerns in two ways: First, we expand the set of monetary policy announcements to include speeches by the Fed Chair, which essentially doubles the number and importance of announcements in our dataset. Second, we explain the predictability of the monetary policy surprises in terms of the ‘Fed response to news’ channel of Bauer and Swanson (2021) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on financial markets are largely unchanged. Second, estimates of the macroeconomic effects of monetary policy are substantially larger and more significant than what most previous empirical studies have found.

Publication
NBER Macroeconomics Annual