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Title: Understanding instruments in macroeconomics: A study of high-frequency identification Authors:  Pooyan Amir Ahmadi - University of Illinois and Amazon (United States) [presenting]
Christian Matthes - Indiana University (United States)
Mu-Chun Wang - Deutsche Bundesbank (Germany)
Abstract: The effects of monetary policy shocks are regularly estimated using high-frequency surprises in asset prices around central bank meetings as an instrument. These studies assume a constant relationship between the instrument and the monetary policy shock. By allowing for time variation in this relationship, we show that only a few distinct periods are informative about monetary policy shocks. We thus build a narrative for instrument-based identification and sharpen results: for the instrument, the effect of monetary policy shocks on the (log) price level is almost 50 percent larger than the standard specification would suggest. This result can be obtained using only 10 percent of all available observations of the instrument.