Disentangling the Information and Forward Guidance Effect of Monetary Policy Announcements on the Economy

When monetary policy announcements not only induce market participants to update their expectations about the future path of monetary policy but also about economic prospects, the identification of exogenous monetary policy shocks becomes challenging. Taking into account an information effect regarding economic prospects, this paper presents a novel strategy to decompose the information content of central bank announcements. Based on a formally derived prediction of the standard New Keynesian model, the identifying assumption reads that the information effect should be correlated with movements in 5-Year, 5-Year breakeven inflation rates on announcement days. Separating distinct dimensions of monetary policy with a clear structural interpretation, the effects of monetary policy announcements on the macroeconomy are investigated using a vector autoregression identified with external instruments. My results highlight the effectiveness of forward guidance in influencing output.