What Are Empirical Monetary Policy Shocks? Estimating the Term Structure of Policy News

Empirical monetary policy shocks (EMPS) contain information about monetary policy both today and in the future. We define the term structure of monetary policy news as the marginal impact of an EMPS on the policy residual at each horizon. Policy news at different horizons has different effects, so knowing the term structure is necessary in order to use an EMPS to evaluate theory. We develop an IV method to estimate this term structure. We find that EMPS in the literature do not represent textbook policy surprises. Instead, they represent a mix of information about policy at many horizons, and this mix varies depending on how the EMPS is identified. We use the estimated term structures to construct synthetic forward guidance and surprise shocks, and estimate their macroeconomic effects. Surprise interest rate hikes are contractionary with little effect on prices, while long-term forward guidance is deflationary.