Monday 6 February 2017

Keeping Count

In the latest, 6th February, item on Bank Underground from the Bank of England, Silvia Miranda-Agrippino discusses "The surprise in monetary surprises, a tale of two shocks."

It seeks to explain why the markets jump about after announcements where the content is not entirely expected.

The full article is here and not very long but a little intricate in its content, having some serious math's. It concludes:


The empirical identification of monetary policy shocks requires isolating exogenous shifts in the policy instrument that are not due to the endogenous response of policy to the economic outlook.

We argue that while market surprises successfully capture the component of policy unexpected by market participants, they map into the shocks only under the (restrictive) assumption that markets can correctly and immediately disentangle the systematic component of policy from any observable policy action.

We develop a new measure for monetary policy shocks that is orthogonal to the central banks own forecasts and unpredictable by past information.

This measure allows us to recover impulse response functions with the ‘right’ signs, even in small and informationally deficient VARs.


So now you know.


  1. "This measure allows us to recover impulse response functions with the ‘right’ signs"

    I wonder what they do with them once they are recovered.

  2. I'll trade you one orthogonal for two exogenii.