Unsurprising shocks: information, Premia, and the Monetary Transmission

This article studies the information content of monetary surprises, i.e. the reactions of financial markets to monetary policy announcements. We find that monetary surprises are predictable by past information, and can incorporate anticipatory effects. Surprises are decomposed into monetary policy shocks, forecast updates, and time-varying risk premia, all of which can change following the announcements. Hence, their use as identification devices is not warranted, and can have strong qualitative and quantitative implications for the estimated responses of variables to the shocks. We develop new measures for monetary policy shocks, independent of central banks’ forecasts and unpredictable by past information.