Top CEPR Discussion Paper of 2025 - DP19923
Disentangling Monetary Policy, Central Bank Information, and Fed Response to News Shocks
Marek Jarocinski, Peter Karadi
https://ow.ly/ta7M50XLqSF
#CEPR_MEF #EconSky #2025inReview
4/4 Purified monetary policy shocks align well with theoretical predictions: a tightening leads to a temporary downturn 🔻, lower prices 📉, and tighter financial conditions 💰.
📄 Full paper here: bit.ly/4jUJvm8
3/4 In this paper, we find you also need to control for Fed communication about the economic outlook. 🏦💬 The high-frequency co-movement of interest rate and stock-price surprises can help you achieve this. 📊🔎
2/4 Michael Bauer & Eric Swanson (2024a,b) argued that the Fed’s unexpectedly aggressive response to recent news biases measurement and must be controlled for.
They have a point. But is that enough? 🤔
1/4 The challenge: Fed surprises aren’t just temporary rate shocks. They can also change market perceptions about the economic outlook and systematic policy. This can contaminate measurement. 📉📈
📢 New paper with Marek Jarociński (ECB) using Fed announcements to measure the impact of Fed policy on activity and prices. 🔍📊
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