Author : Bosung Jang(Korea Capital Market Institute), Inhwan So(Bank of Korea)

<Abstract>

Jarociński and Karadi (2020) proposed a straightforward method to deconstruct monetary policy surprises into pure monetary policy shocks and central bank information shocks by exploiting the opposite-signed comovements between stock price surprises and the two shocks. Expanding upon their approach, this paper examines and compares a variety of alternative instruments, including New Keynesian- and Fama-French factor-based, for the decomposition of monetary policy surprises. Our results collectively suggest that Fama-French’s High-minus-Low factor is a promising navigator, almost comparable to Jarociński and Karadi’s instrument. Each identified shock brings about significantly different effects on the economy, in line with theoretical predictions. We also evaluated the informational content of each pair of candidate shocks.