Staff Working Paper No. 886
The interaction between macroprudential
policy and monetary policy: overview
Matthieu Bussière, Jin Cao, Jakob de Haan, Robert Hills,
Simon Lloyd, Baptiste Meunier, Justine Pedrono,
Dennis Reinhardt, Sonalika Sinha, Rhiannon Sowerbutts
and Konstantin Styrin
October 2020
Staff Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state
Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of
the Monetary Policy Committee, Financial Policy Committee or Prudential Regulation Committee.
Staff Working Paper No. 886
The interaction between macroprudential policy
and monetary policy: overview
Matthieu Bussière,(1) Jin Cao,(2) Jakob de Haan,(3) Robert Hills,(4)
Simon Lloyd,(5) Baptiste Meunier,(6) Justine Pedrono,(7) Dennis Reinhardt,(8)
Sonalika Sinha,(9) Rhiannon Sowerbutts(10) and Konstantin Styrin(11)
Abstract
This paper presents the main findings of an International Banking Research Network initiative examining the
interaction between monetary policy and macroprudential policy in determining international bank lending.
We give an overview on the data, empirical specifications and results of the seven papers from the initiative.
The papers are from a range of core and smaller advanced economies, and emerging markets. The main findings
are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the
spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy
in core countries can also affect the cross-border transmission of domestic monetary policy via lending abroad,
by limiting the increase in lending by less strongly capitalised banks. Second, the findings highlight that
studying heterogeneities across banks provides complementary insights to studies using more aggregate data
and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or
G-SIB status play a first-order role in the transmission of these policies. Finally, the impacts differ considerably
across prudential policy instruments, which also suggests the importance of more granular analysis.
Key words: Cross-border bank lending, financial intermediation, monetary policy, macroprudential policy,
policy interactions, spillovers.
JEL classification: E52, F21, F30, F42, G21.
(1) Banque de France. Email: Matthieu.BUSSIERE@banque-france.fr
(2) Norges Bank. Email: Jin.Cao@Norges-Bank.no
(3) De Nederlandsche Bank, University of Groningen and CESifo. Email: jakob.de.haan@rug.nl
(4) Bank of England. Email: robert.hills@bankofengland.co.uk
(5) Bank of England. Email: simon.lloyd@bankofengland.co.uk
(6) Banque de France. Email: Baptiste.MEUNIER@banque-france.fr
(7) Banque de France. Email: justine.pedrono@banque-france.fr
(8) Bank of England. Email: dennis.reinhardt@bankofengland.co.uk
(9) Reserve Bank of India. Email: sonalikasinha@rbi.org.in
(10) Bank of England. Email: rhiannon.sowerbutts@bankofengland.co.uk
(11) Bank of Russia. Email: kstyrin@nes.ru
The views expressed in this paper are those of the authors and do not necessarily represent those of the institutions they are
affiliated with. We would like to thank Claudia Buch, Linda Goldberg, Galina Hale, as well as participants in seminars at the IMF,
the Banque de France, the Federal Reserve Bank of New York, and the BIS for helpful comments.
The Bank's working paper series can be found at www.bankofengland.co.uk/working-paper/staff-working-papers
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© Bank of England 2020
ISSN 1749-9135 (on-line)
1. Introduction
This paper presents the methodology and broad results from an innovative, internationally
coordinated project of the International Banking Research Network (IBRN), which explores how the
interaction of monetary and macroprudential policy affects the cross-border transmission of policy
through global banks.2 The project builds in particular on two previous IBRN initiatives that explored,
separately, the cross-border transmission of both monetary and macroprudential policy actions via
bank lending (for summaries, see Buch and Goldberg, 2017, and Buch et al., 2019).
Since the global financial crisis (2007-2009), macroprudential policies have joined monetary policy as
an important component of policymakers' toolkits (Blinder et al., 2017 and Galati and Moessner, 2018),
and international debates have increasingly focused on the impact of cross-border spillovers from
those actions. The interaction of monetary and macroprudential policy, however, remains
underexplored, both academically and from a policy perspective.
This research initiative directly addresses two strands of the policy debate:
(a) How does monetary policy in major economies spill over to the rest of the world? To what
extent can domestic macroprudential policy or capital flow management measures in recipient
countries offset monetary policy spillovers?3
(b) How do monetary and macroprudential policy interact? Should these two instruments be seen
as complements or substitutes? Commentary on this issue (for instance, Broadbent, 2018) has
been largely domestic in nature so far.
Despite the interest from policymakers, there is not yet a settled analytical backdrop to key aspects of
the debate. In the literature, there is a lively discussion on the extent to which there is a global financial
cycle, driven by core country monetary policy (for instance, Miranda-Agrippino and Rey, 2020), and
the trade-offs this poses for policymakers (for instance, Bruno and Shin, 2015). There is a body of
evidence on how prudential policy affects the domestic transmission of monetary policy (for instance,
Maddaloni and Peydro, 2013) and an emerging strand on how prudential policies can offset the
unintended consequences of monetary policy (for instance, Takáts and Temesvary, 2019). But, taken
as a whole, the empirical evidence on the extent to which macroprudential policy affects the
transmission of monetary policy and mitigates the propagation of shocks across borders remains
scarce.
This initiative by the IBRN comprises six studies by economists from eleven central banks, plus a
crosscountry study by economists from the Bank for International Settlements (BIS), all of which use
confidential micro banking datasets. The studies therefore emphasize the importance of
understanding heterogeneity in banks' responses to monetary and macroprudential policy actions,
which in turn reflects the capital and liquidity position of individual banks, their risk profiles, access to
different types of funding such as through the wholesale market, availability of collateral, or access to
an internationally active banking network, which themselves are indicators of underlying market
frictions.
The purpose of the project is to move forward our collective understanding by applying, as far as
possible, a common empirical strategy to each country's individual bank-level dataset. This common
strategy is set out in sections 2, 4 and 5 below. Given the range of possible cases of interactions that
teams could examine, this has not taken the form of an identical specification followed by all teams;
rather, the different teams have tailored the common approach to fit the idiosyncratic characteristics
of their countries. So, unlike for previous IBRN projects, this overview paper does not conduct formal
meta-analysis; instead, it places the results in a common framework.
These conclusions are based on seven papers (some of the central banks have teamed up to write a
joint paper rather than one paper per country). These span research for the: United States; United
Kingdom and France; Germany; the Netherlands and Ireland; Chile, Mexico and Russia; Norway and
Sweden; and a paper using aggregate data from the BIS. The participating countries differ substantially
with regard to their monetary and macroprudential policy frameworks, the structure of their banking
sector, and the overall macroeconomic environment. The countries include both the largest advanced
economies and a number of significant emerging markets. This heterogeneity is a key asset for the
project as a whole, as it allows cross-country comparisons.
The main findings of the papers included in this special issue are as follows. First, the interactions
between monetary and macroprudential policies are significant. Macroprudential policy in recipient
countries can partly offset the effects of monetary policy conducted in core countries, a result that is
found across many countries, including emerging market economies such as Chile, Mexico or Russia
and advanced countries such as Norway or Sweden. While these effects are statistically significant, the
degree of offset differs across country studies, suggesting that these instruments are not in all cases
fully sufficient in neutralizing the effect of foreign monetary policy. In addition, domestic
macroprudential policy in the US significantly affects the transmission of domestic monetary policy to
lending abroad. This is an important result, which suggests that there is scope for macroprudential
policy in the source countries to attenuate the international spillover effects from domestic monetary
policy. Second, it is important to analyze these effects at the bank level. Key bank characteristics such
as bank size or global systematically important bank (G-SIB) status play a first-order role in the
transmission of these policies. Finally, impacts differ considerably across prudential policy instruments,
which might in part reflect the fact that certain instruments are often used for specific purposes (for
instance, some are cyclical and others are structural). This also suggests the importance of more
granular analysis.
The remainder of this paper proceeds as follows. Section 2 considers the hypotheses and identification
strategy. Section 3 reviews the relevant literature. Section 4 presents the data and some key
definitions. Section 5 sets out the common empirical approach in more detail. Section 6 summarizes
the results from the country teams' investigations. Section 7 concludes.
2. Hypotheses and identification
Previous IBRN projects looked in detail at the identification challenges that arise around estimating the
spillovers to bank lending from monetary policy (Buch et al. 2019) and macroprudential policy (Buch
and Goldberg, 2017). These challenges remain highly relevant to a project looking at the interactions
between the two. They include: how to relate the data to the theoretical foundation of policy
transmission and the relevant frictions affecting international spillovers; how to identify credit demand
and supply; and how to distinguish the effects of foreign policy from those of domestic policy.
In this section, rather than repeating material covered in those papers, we therefore focus on how the
interactions between different types of policy action could produce new transmission channels and
offsetting or amplifying effects.
In the literature on monetary policy transmission, studies tend to distinguish between two main
channels through which banks respond to changes in the monetary policy stance, which have broadly
offsetting effects (Buch et al., 2019):
• The bank lending channel. In the classical formulation of this channel, monetary policy works
by changing both the short-term funding costs paid by banks and the liquidity constraints that
banks are facing. In the case of a monetary tightening, banks might have to cut lending
(including international lending) if they cannot access alternative sources of funding.
• The portfolio (or balance sheet) channel. In this channel, monetary policy works by changing
the risk structure of banks' assets, prompting them to substitute into different assets. In the
case of a monetary tightening, which may reduce the net worth of domestic borrowers, banks
might substitute away from domestic credit and toward foreign credit, increasing cross-border
lending.
The transmission channels of macroprudential policies to international bank lending are much more
heterogeneous, differing substantially across banks, countries, and instruments.4 Buch and Goldberg
(2017) note that, in terms of international spillovers, no single theoretical model captures the range of
possible international transmission channels and bank-level responses to different prudential policy
instruments. They conclude that that there is not a one-size-fits-all channel or even direction of
transmission that dominates spillovers, that simple arguments about regulatory arbitrage do not
characterize the diversity of experiences across countries, and that almost all prudential instruments
have been associated with both positive and negative spillovers, within and across transmission
channels, depending on banks' balance sheet characteristics and business models.
For the current project, then, the question is how we would expect these transmission channels of
monetary and macroprudential policies to interact. In principle, they could be complements,
reinforcing each other; or they could be substitutes, with offsetting effects, perhaps even to the extent
of cancelling each other out.5 It is useful to consider some stylized and historical examples of each in
turn.
• Complements. Policymakers could use a combination of macroprudential and monetary
policies to reinforce each other and thereby moderate business and financial cycles. In the
United Kingdom in July and August 2016, for instance, following the United Kingdom's vote to
leave the European Union, the Bank of England announced a cut in Bank Rate and additional
purchases of UK corporate and government bonds, alongside a reduction in its countercyclical
capital buffer, reversing an increase announced earlier in the same year. Similarly, at the onset
of the Covid-19 public health crisis in early 2020, central banks and supervisors across the globe
simultaneously announced accommodative monetary policy packages and less binding
prudential measures to mitigate the economic consequences of the pandemic.
• Substitutes. Policymakers could choose to use either monetary or macroprudential policies to
moderate business and financial cycles. For instance, although the countercyclical capital
buffer has a primary objective of "protecting the banking sector from periods of excess
aggregate credit growth ... [it] may also help to lean against the build-up phase of the credit
cycle in the first place" (BIS, 2010, p. 1). There is an active policy debate about just how
interchangeable monetary and prudential tools are for different policy purposes, well
summarized in Stein (2013), who tends towards the view that there are situations where it
might make sense to enlist monetary policy tools in the pursuit of financial stability.
• Mitigating each other. Domestic macroprudential policies can act to offset spillovers from
foreign monetary policy. For instance, the IMF (2012) noted that, in response to the large
capital inflows to emerging markets in the early years of the decade, macroeconomic policy
responses were accompanied by prudential measures, such as Brazil's tax on certain types of
inflows, Indonesia's holding period on central bank bond purchases, and Korea's leverage caps
on banks' derivatives positions (p. 17). This can also be the case within a monetary union:
from the perspective of Ireland, for instance, former Governor Lane (2017) commented that
"if macro-financial conditions in an individual member country substantially deviate from the
rest of the euro area, the area-wide monetary policy may not be optimal from the perspective
of the country in question...to mitigate the impact of this type of internal spillover, it is now
widely accepted that national macroprudential policies can play an important role, especially
in relation to differences in financial cycles across member countries".
The papers in this IBRN initiative therefore explore empirically some aspects of these interactions, from
a cross-border perspective. Given the use of individual bank-level datasets, country teams are
particularly interested in investigating the role of bank heterogeneity, specifically that these effects
would be strongest for banks with particular characteristics.
For instance, one might posit that macroprudential policy in recipient countries works well at
attenuating spillovers from core-country monetary policy because it affects the same types of banks
that are (over-) affected by the core-country monetary policy in the first place (or perhaps generates
an offsetting reaction from other types of banks). In that case, one could base a hypothesis on a
stylized story such as one of the following:
a. Core monetary policy tightens. That leads banks with certain characteristics to reduce
their lending via the bank lending channel - perhaps smaller banks with less access to
alternative sources of funding. Macroprudential policy attenuates that effect, either
directly by easing other funding sources for the banks affected, or in aggregate by
encouraging lending by other banks. Furthermore, macroprudential policy taken in the
past may act more generally to reduce the cyclicality of bank lending and exposure to
global shocks, including by strengthening resilience. The domestic banking sector as a
whole retrenches by less than it would otherwise have done.
b. Core monetary policy tightens. That leads banks with certain characteristics to
increase their lending to other countries via the portfolio balance channel - perhaps
larger banks with greater international presence. In the recipient country, domestic
macroprudential policy attenuates that expansion of credit, either directly (for
instance via measures that discourage cross-border wholesale funding) or perhaps by
discouraging lending by smaller, domestic banks. In aggregate, the domestic banking
sector as a whole expands credit by less than it would otherwise have done.
These are, of course, only illustrative examples. Country teams have tailored their hypotheses to the
particular circumstances of their investigations.
3. Literature
There are several strands in the literature that address relevant questions, namely: to what extent is
there a global financial cycle, driven by core country monetary policy? What trade-offs does this pose
for policymakers, and how can they manage them? How does prudential policy affect the domestic
transmission of monetary policy? How can prudential policies offset the unintended consequences of
monetary policy? And what does the empirical evidence on interactions show?
(i) Is there a global financial cycle, and what trade-offs does this pose for policymakers?
Empirically, there is a high degree of co-movement in capital flows, asset prices and credit growth in
the world economy. This has been labelled a 'global financial cycle' (Passari and Rey, 2015)6 , of which
US monetary policy is one of the primary determinants (Miranda-Agrippino and Rey, 2020; Rey, 2015).
This has generated a number of studies into the trade-offs faced by policymakers in open economies.
Rey (2015) has argued that the global financial cycle can transform the traditional international
macroeconomics policy 'trilemma' - with free capital movement, independent monetary policies are
feasible if and only if exchange rates are floating - into a 'dilemma' - independent monetary policies
are possible if and only if the capital account is managed.
(ii) How might policymakers seek to manage those trade-offs?
Prudential policy can be used as an additional tool to balance these trade-offs, by potentially shielding
countries from the global financial cycle and reducing their sensitivity to global shocks, as discussed
for instance in Bruno and Shin (2015), Takáts and Temesvary (2019) and Coman and Lloyd (2019).
Extending Bruno and Shin (2015) and Rey (2015), Cao and Dinger (2018) find empirically that monetary
policy in small-open economies may be limited by global financial flows, especially during monetary
tightening; thus, implying a need for prudential measures to "lend a hand" to monetary policy in
containing credit booms. This finding echoes theoretical results established by Mimir and Sunel (2019)
using a model capturing financial market imperfections in open emerging market economies.
(iii) How does prudential policy affect the domestic transmission of monetary policy?
In general, the lending volume of poorly-capitalized, higher risk-taking and less liquid banks will be
more sensitive to a tightening of monetary policy. Hence, tighter regulations would generally be
expected to reduce the effectiveness of monetary policy. Several papers (including Aghion and
Kharroubi, 2013; Budnik and Bochmann, 2016; and Disyatat, 2010) demonstrate at the individual bank
level that the response of lending to monetary policy is lower for better capitalized banks. Consistent
with this, other papers (e.g. Gambacorta and Mistrulli, 2004) show that the impact of policy rates on
bank lending is greater for poorly-capitalized banks. Finally, there is evidence that more liquid banks
and banks with longer-term funding are less responsive to monetary policy actions: Kashyap and Stein
(2000) show that monetary policy has a greater impact on banks with lower buffers of liquid assets.
However, the impact could be at least ambiguous, at most asymmetric: a healthier financial sector
would be better placed to pass along monetary easing. For the euro area, Maddaloni and Peydro (2013)
find that better-capitalized banks have been able to soften more their lending conditions during the
crisis, thereby being more responsive to countercyclical monetary support. Dell'Ariccia et al. (2016)
point out that the risk-taking channel is greater for better capitalized banks. A second caveat is
highlighted in BIS (2015): the extent to which monetary policy transmission channels are altered
depends on the degree to which the regulations are binding, once banks have adjusted to the new
regime.
(iv) How can prudential policies offset the unintended consequences of monetary policy?
One strand of the theoretical literature notes that prudential policy is a necessary complement to
monetary policy, especially under situations where monetary policy alone cannot restore efficiency.
For instance, Svensson (2014) argues that "leaning-against-the-wind" type of monetary policy may
erode financial stability, while Korinek and Simsek (2016) find that prudential policy reducing excessive
leverage mitigates liquidity traps where monetary policy is limited. Angeloni and Faia (2013) suggest
that prudential policy improves welfare when productivity shocks affect bank leverage, and prudential
policy is needed when there is uncertainty on whether credit cycles are caused by productivity shocks
or financial shocks (Kiley and Sim, 2015).
However, the interaction between monetary and prudential policies may also be ambiguous. Repullo
and Suarez (2013) suggest that business cycles (on which monetary policy is typically based) and credit
cycles (on which prudential policy is typically based) do not always coincide, so that the impacts of the
two policies can either complement or conflict with each other. Angelini et al. (2014) argue that the
two policies complement each other appropriately only in "abnormal" times when financial shocks are
major drivers of macroeconomic dynamics.
In contrast, focusing on banks' excess risk taking, Collard et al. (2017) find that non-cooperative,
separate monetary and prudential policies are optimal, given that prudential measures generate
positive externalities to monetary policy.
(v) What does the empirical evidence show on the interaction between monetary and
prudential policies?
The literature on the interaction between monetary and prudential policies is relatively scarce, and
mostly focuses on the interaction of domestic policies, without a cross-border angle; exceptions are
Avdjiev et al. (2017) and Coman and Lloyd (2019).
In the bulk of the empirical work, such as IMF (2013), Aiyar et al. (2014), or Dell'Ariccia et al. (2012),
the interaction term is found to be insignificant. There are some exceptions: the interaction between
very specific policies in the UK (microprudential capital requirements interacted with the Funding
Lending Scheme) in Forbes et al. (2017), the effect of macroprudential measures on cross-border
lending during the taper tantrum in Takáts and Temesvary (2019), the effects of the interaction term
(but only for small banks) in De Marco and Wieladek (2015), and the interactions with Pillar II capital
requirements in De Jonghe et al. (2020). Gambacorta and Murcia (2019), using credit registries in five
Latin American countries, investigate specifically the interaction between domestic prudential and
monetary policies, finding that prudential policy has a greater effect on credit growth if monetary
policy goes in the same direction.
4. Data and variable definitions
4.1 Prudential policy measures
Papers rely on a range of data sources for prudential policy measures, including cross-country data
sources and country-specific data sources.
Cross-country data sources. The main cross-country dataset employed is by Cerutti et al. (2017, data
updated to 2017). The data assigns the value of +1 to a given prudential policy if it was tightened in a
specific period, the value of -1 if it was loosened, and 0 if no change occurred.7 Although this has the
disadvantage of excluding information on the specific intensity of prudential instruments, the data is
available for a long period for a wide set of countries and prudential policy instruments.
An important source of residency-based (capital control) measures is by Fernandez et al. (2016), which
includes information on the stance of residency-based measures for a wide range of countries until
2013.
Country-specific data sources. Richer country-specific prudential policy data is taken from central
bank or regulatory agencies and detailed in the individual papers underlying this initiative.
4.1.1 Assessing prudential policy stance
A few studies in this initiative require information on the prudential stance. There are - to our
knowledge - no data that contain cross-country information for a wide sample that would allow to
measure the intensity of prudential policies across a range of measures. We therefore rely on
cumulated measures as a proxy for the prudential policy stance. A possible option is to proxy the stance
with cumulated prudential policy actions over two years before the transmission period of the
monetary policy surprise to account for time lags in the transmission of prudential policy that could
interact with subsequent monetary policy. In addition, there is a concern about whether there is an
impact of monetary policy (MP) on prudential policies via the dependent variable (e.g. in case policy
makers see bank funding evaporating following a tightening of MP abroad and then loosen prudential
regulations). The final concern is that the more recent actions are included in the proxy of prudential
stance the higher the chance that we include a transmission effect of prudential policies (earlier IBRN
studies suggests a 1-year transmission period). This concern can be dealt with by cumulating prudential
actions only up to t-K-1 (i.e.to t-4 if K=3 or t-2 if K=1),8 so over t-4 to t-11 in case of cumulating actions
over two years.
Alternative specifications include cumulating measures over longer period given that (i) it might take
time for prudential policies to effect bank resilience and (ii) some prudential policy measures are
cyclical and the results might hence be driven by the point in the cycle prudential policies are enacted:
cumulating over a longer time period might hence alleviate these concerns. Of course, the longer the
time period the larger the concern that the resulting measure of the prudential policy stance (including
e.g. pre-crisis actions) is not a reflection of the prudential policy stance of most relevance for bank
resilience today and that is why the baseline is two years.
4.1.2 Types of prudential policies
There are various dimensions of prudential policies of interest: i) measures aimed at borrowers, ii)
measures aimed at financial institutions, iii) measures aimed at building buffers and iv) measures
aimed at moderating external sector spillover effects. Cerutti et al. (2017) split actions into capital
(general and sectoral), reserve requirements, LTVs, large exposures and concentration limits. The
appropriate choice for prudential policies depends on the specific case.
One issue of special relevance for the project on policy interactions is that reserve requirements are
often used as a monetary policy tool. In order to address this, some authors have complemented the
pre-defined index from the database with an index that excludes reserve requirements.
4.2 Monetary policy measures
In the literature on the interaction between monetary and prudential actions, various measures of
monetary policy are used: excess reserves, policy rates or shadow rates, deviations from the Taylor
rule, and monetary policy shocks/surprises - sometimes with dummies indicating tightening episodes
to allow for asymmetry. Papers testing different measures find that there does not seem to have one
yielding better results than the others regarding the significance of the interaction term.
The primary concern for this project is that the preferred measure of monetary policy is exogenous
with respect to the dependent variable (bank lending growth), i.e. that monetary policy does not react
to changes in bank lending growth or its determinants. This is not guaranteed when using 'raw'
measures of monetary policy, such as policy rates or excess reserves, although a rich specification of
fixed effects and control variables can ensure exogeneity. Nevertheless, there is an extensive academic
literature on the identification of exogenous monetary policy measures (e.g. Kuttner, 2001; Gürkaynak
et al., 2005; Gertler and Karadi, 2015; Jarociński and Karadi, 2020).
The various papers in this special issue use different monetary policy measures depending on the
nature of monetary policy actions in the region of interest and the richness of control variables in their
regression specification. Broadly, authors use either shadow rate measures or exogenous monetary
policy 'shocks' or 'surprises'.
Shadow rates of interest. All studies in this special issue use data for the post-global financial crisis
period. In response to the crisis, central banks in many advanced economies lowered short-term policy
interest rates to their effective lower bound (ELB) and enacted 'unconventional' monetary policies
(UMPs), such as large-scale asset purchases and forward guidance. With short-term policy rates at
their ELB, UMPs were designed to provide economic stimulus by lowering longer term interest rates.
As a result, measures of short-term interest rates alone cease to reflect the overall 'stance' of
monetary policy for the period.
Accounting for this, shadow rate models have been employed to measure the stance of monetary
policy, accounting for the range of monetary policy actions taken by central banks. Prominent
examples of shadow rate estimates include Wu and Xia (2016), for the US, and Krippner (2015) for the
US, euro area, UK and Japan.
In situations where the empirical specification includes a rich set of controls and fixed effects, and the
monetary policy measure can be reasonably argued exogenous to the dependent variable of interest,
some papers in this special issue utilize changes in shadow rates to measure innovations to the overall
stance of monetary policy.
Monetary policy shocks and surprises. In other cases, there may be concerns that omitted third factors
may simultaneously influence both the monetary policy measure and the dependent variable of
interest without being adequately accounted for in the set of regression controls and fixed effects. In
these instances, teams have drawn on exogenous measures of monetary policy innovations,
constructed using high-frequency financial market information.
These exogenous measures of monetary policy are derived from monetary policy 'surprises', which
reflect changes in monetary policy expectations - measured using intraday financial market rates -
around monetary policy announcements (Kuttner, 2001). Data for the US come from Gürkaynak et al.,
2005, extend