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🧵: What does monetary policy do? Our best evidence comes from quality empirical monetary policy shocks (EMPS) using high-frequency and narrative methods. … but what *are* these shocks?

Philip Barrett @phibar.bsky.social and I address this question in a new working paper. In it, we propose a method to extract the news that EMPS contain about future policy, and apply the method to many shocks from the literature. There is a lot to learn!

Background: EMPS are used to evaluate our theories of monetary policy. But this cannot really be done without knowing what the EMPS *are*. EMPS are not just textbook target rate surprises. They also contain “news shocks” about future policy.

Important: surprise shocks have different effects from news shocks at every news horizon. Here’s how they affect prices in the New Keynesian model:

Estimation has 4 stages: 1. Instrument for endogenous variables using macro IVs (Barnichon-Mesters) 2. Estimate policy rule by IV 3. Whiten the policy residual to find the innovation 4. Regress on past EMPS (local projection) The coefficients from the final stage = term structure

This is an unbiased estimator of the term structure! We also derive a smooth-local-projection variant. Convenient: both can be written as a single-stage estimator with analytical standard errors (no bootstrap!)

Application #1: We estimate the term structures of popular EMPS in the literature. E.g. here is the term structure for Swanson’s forward guidance shock. Nearly all the information is news about future policy.