Identification and Effects of U.S Monetary Policy Before and After the Unconventional Monetary Policy


This research claimed that to evaluate the effects of monetary policy announcements correctly, a measure of the monetary policy surprises is needed. Specifically, as the efficient market hypothesis assumes that financial asset prices respond only to unexpected policy news or actions, this entails the necessity to measure surprise components. For example, if a monetary policy announcement, albeit contains a substantial change, is entirely expected, it will not have any surprise on the market; thus, financial asset prices will not change since the action will already have been priced in. In this regard, this chapter firstly, identified the monetary policy surprise components namely, the target surprise and the path surprise by using the event study method. This method requires a narrow-enough window length around the interest of announcement that nothing other than the announcement should be influencing the financial asset prices since the window size is a key element of the event study, and it must be neither too long and not too short. A longer window might be influenced by the impact of other surprises on financial markets, while a shorter window may be unable to obtain the full impact of the monetary policy surprises. In this regard, I found that the daily window is too long to fulfill this requirement and further, suggested the use of intra-daily data as an alternative, particularly for the analysis in recession times.

University of Nottingham, School of Economics.