The Transmission of Monetary Policy Shocks

In the presence of information frictions, commonly used instruments for the identification of monetary policy disturbances combine the true policy shock with information about the state of the economy to which the central bank endogenously reacts. This paper shows that information effects can give rise to the empirical puzzles reported in the literature, and proposes a new high-frequency identification of monetary policy shocks that accounts for informational rigidities. We employ this identification in a novel flexible econometric method robust to misspecifications that bridges between VARs and Local Projections, and assess the model dependence of our results. Findings show that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.

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