Central Bank Communication: Information and Policy shocks

Ostapenko, Nataliia (2020): Central Bank Communication: Information and Policy shocks.

Abstract

The study proposes a novel way to identify the effects of monetary policy shocks taking into account time-varying signals of the central bank. I augment the standard monetary policy Bayesian Vector Autoregression (BVAR) with additional information variables from Fed statements, which allows studying the information-free effects of monetary policy shocks and to take into account forward-looking information released by the central bank. The results show that, compared to surprises in 3-month federal funds futures, the policy shock identified in this study has a more negative effect on GDP, a more prolonged negative effect on inflation, and a greater impact effect on the excess bond premium. In the short-run it causes S&P500 to decline and the Fed to raise its interest rate. Furthermore, the results of large-scale Bayesian VAR confirm the standard transmission channels of monetary policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy, shock, transmission, statements, Latent Dirichlet Allocation, information
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

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