High-Frequency Identification of Monetary Non-Neutrality: The Information Effect

The Information Effect and High-Frequency Data

Recent advances in high-frequency econometrics have spurred a growing interest in the information effect of monetary policy shocks.

The information effect refers to the impact of monetary policy announcements on financial markets and the real economy, even in the absence of any fundamental change in monetary policy.

The Identification Challenge

Identifying the information effect is challenging because it is difficult to separate from other factors that may affect financial markets and the economy.

High-Frequency Data to the Rescue

High-frequency data, such as tick-by-tick data on stock prices or high-frequency data on macroeconomic variables, can help to overcome this identification challenge.

Advantages of High-Frequency Data

• Allows researchers to examine the immediate impact of monetary policy announcements.
• Provides a more accurate measure of the information content of monetary policy shocks.
• Reduces the potential for confounding factors to bias the results.

Empirical Evidence

Several empirical studies have used high-frequency data to identify the information effect of monetary policy shocks.

Stock Prices

Studies have shown that stock prices react immediately to monetary policy announcements, with positive announcements leading to increases in stock prices and negative announcements leading to decreases.

Exchange Rates

Monetary policy announcements have also been shown to have a significant impact on exchange rates, with announcements of tighter monetary policy leading to an appreciation of the domestic currency.

Real Economy

Some studies have found that monetary policy announcements can have a modest impact on real economic variables, such as industrial production and consumer spending.

Conclusion

High-frequency data has become an important tool for identifying the information effect of monetary policy shocks.

Empirical evidence suggests that monetary policy announcements have a significant impact on financial markets and, to a lesser extent, on the real economy, even in the absence of any fundamental change in monetary policy.