Purged rate surprises reveal stronger monetary policy transmission
High-frequency interest rate surprises conflate pure policy shocks with central bank information and rule misperceptions, according to an ECB working paper by Marek Jarociński and Peter Karadi covering over 600 Fed events from 1988 to 2025.
Untangling three distinct market impulses
Analyzing 696 Fed communication events between 1988 and 2025, the study isolates three distinct forces behind interest rate surprises: pure policy shocks, central bank information effects, and market misperceptions of the policy rule.
While favorable central bank information moves rates and stock prices in the same direction, policy rule misperceptions and pure monetary shocks create opposite co-movements.
The authors combine these high-frequency sign restrictions with heteroskedasticity across FOMC meetings and non-FOMC events like speeches and testimonies.
FOMC announcements exhibit stronger policy rule misperceptions, whereas non-FOMC events convey substantially more central bank information.
From daily market shifts to monthly macro trends
In daily local projections, rule misperceptions worsen financial conditions and lower inflation expectations, but their macroeconomic effects wash out in monthly vector autoregressions.
In contrast, central bank information effects generate persistent economic expansion across horizons.
Purging both confounding factors yields a sharper output downturn and a significant price decline from smaller initial rate impulses.
Under structural modeling, this doubly-purged shock aligns with realistic annual price adjustments and active credit spread frictions.
Essential clarity for policy estimation
The study provides an overdue reconciliation of competing identification approaches in empirical macroeconomics.
By demonstrating that information effects and rule misperceptions coexist rather than compete, it substantially raises the empirical standard for estimating monetary transmission.
However, the heavy data demands of the three-way decomposition may limit its practical application in thinner empirical settings.