Jonathan Adams

🧵: 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?

Bonus: IV estimation of the Taylor rule works very well. Reliable, robust. If you are interested in this method, you can find the macro shocks we use here: github.com/jonathanjada...

🧵: 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?

Unwelcome news if you wanted to use EMPS to study textbook policy surprises? Fortunately, we offer a way to do that (and more!) Using our method, it is possible to construct a *synthetic* monetary policy shock approximating any desired term structure of policy news!

🧵: 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?

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.

🧵: 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?

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

🧵: 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?

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

🧵: 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!