Identifying Monetary Policy
Paper Session
Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Philippe Andrade, Federal Reserve Bank of Boston
FOMC Communication Events and Monetary Transmission
Abstract
High-frequency market movements around monetary policy announcements can help identify effects on interest rates, asset prices and macroeconomic outcomes. Despite the widespread use of such “monetary policy surprises” in monetary economics and macro-finance, no common empirical benchmark is available for announcements by the Federal Open Market Committee (FOMC), which has led to a profusion of datasets and surprise measures. This paper aims to establish this benchmark by providing a new, publicly available FOMC Communication Event-Study Database (FOMC-CED) with changes in interest rates and asset prices around FOMC announcements, Chair press conferences, and Minutes releases. Using this new database, we make two empirical contributions to the literature on monetary transmission. First, using event studies of the response of inflation swaps and daily price and survey data to policy shocks, we provide new evidence about the speed of the monetary transmission to perceived and realized inflation, that is, the lags of monetary policy. Second, we study the contribution of monetary policy changes, and in particular of changes in forward guidance, to the observed disinflation over the 2022-2024 tightening cycle.Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock
Abstract
Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. At the same time, both of these asset classes display heightened volatility relative to non-announcement times - even after residualizing with respect to the entire yieldcurve. Motivated by these observations, we use a heteroskedasticity-based procedure to estimate a "Fed non-yield shock" which is orthogonal to yield changes and is identifi ed from excess volatility in the S&P 500 and various dollar exchange rates. A positive Fed non-yield shock raises stock prices in the U.S. and around the globe, depreciates the dollar, reduces the VIX and many other risk-related measures, and lowers U.S. convenience yields. Our shock is essentially uncorrelated with previous monetary policy shocks and implies that the Fed moves asset prices through channels that are not spanned by the yield curve.
Estimating the Effects of Political Pressure on the Fed: A Narrative Approach with New Data
Abstract
This paper combines new data and a narrative approach to identify shocks to political pressure on the Federal Reserve. From archival records, I build a data set of personal interactions between U.S. Presidents and Fed officials between 1933 and 2016. Since personal interactions do not necessarily reflect political pressure, I develop a narrative identification strategy based on President Nixon’s pressure on Fed Chair Burns. I exploit this narrative through restrictions on a structural vector autoregression that includes the personal interaction data. I find that political pressure shocks (i) increase inflation strongly and persistently, (ii) lead to statistically weak negative effects on activity, (iii) contributed to inflationary episodes outside of the Nixon era, and (iv) transmit differently from standard expansionary monetary policy shocks, by having a stronger effect on inflation expectations. Quantitatively, increasing political pressure by half as much as Nixon, for six months, raises the price level more than 8%.Higher-Order Moment Inequality Restrictions for SVARs
Abstract
We introduce a method that exploits some non-Gaussian features of structural shocks to identify structural vector autoregressive models. More specifically, we combine restrictions on the higher-order moments of these shocks with other set-identifying constraints, typically sign restrictions. Using simulated data from a broad set of estimated models, we show that this approach considerably narrows the set of monetary policy shocks both in large or small sample settings. The proposed methodology also delivers new insights on the propagation of exogenous changes to US monetary policy, Euro-Area sovereign bond spreads, and worldwide geopolitical risk.JEL Classifications
- E3 - Prices, Business Fluctuations, and Cycles
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit