What Are Empirical Monetary Policy Shocks? Estimating the Term Structure of Policy News
IMF Working Papers, June 27, 2025
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- What Are Empirical Monetary Policy Shocks? Estimating the Term Structure of Policy News
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Bibliographic details
- Authors: Jonathan J. Adams, Philip Barrett
- Published: June 27, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229015233.001
Overview
- Empirical monetary policy shocks (EMPS) contain information about monetary policy both today and in the future.
- The term structure of monetary policy news is defined as the marginal impact of an EMPS on the policy residual at each horizon.
- Policy news at different horizons has different effects; knowing the term structure is necessary to use an EMPS to evaluate theory.
- The authors develop an IV method to estimate this term structure.
Methodology
- An IV method is developed to estimate the term structure of policy news, i.e., the marginal impact of an EMPS on the policy residual at each horizon.
- The term structure estimation is used to decompose EMPS into horizon-specific components that can be interpreted and used for counterfactual shocks.
Key Findings
- EMPS used in the literature do not represent textbook policy surprises.
- Instead, EMPS represent a mix of information about policy at many horizons.
- The mix of horizons represented by an EMPS varies depending on how the EMPS is identified.
Macroeconomic Effects (using estimated term structures)
- The estimated term structures are used to construct synthetic forward guidance and surprise shocks and to estimate their macroeconomic effects.
- Surprise interest rate hikes are contractionary with little effect on prices.
- Long-term forward guidance is deflationary.
Subjects and Keywords
- Subjects: Econometric analysis, Economic theory, Estimation techniques, Financial institutions, Futures, Inflation, Neoclassical theory, Prices, Vector autoregression
- Keywords: Estimation techniques, Forward Guidance, Futures, Inflation, monetary policy news, monetary policy shock, Monetary Policy Shocks, Neoclassical theory, Policy news, surprise interest rate hike, Term Structure, textbook policy surprise, Vector autoregression
Working Paper No. 2025/128
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