Decomposing Monetary Policy Surprises: Shock, Information, and Policy Rule Revision

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Two explanations exist for the output and price puzzles arising from the identification of monetary policy shocks with high-frequency monetary surprises: the ‘information channel’ and the ‘Fed response to news’ hypothesis. We argue that the information channel better explains these anomalies, aligns more closely with empirical evidence, and relies on fewer assumptions. Using a model of imperfect information incorporating both monetary policy shocks and policy rule deviations, we derive testable implications to distinguish the two hypotheses. Our findings show that policy rule deviations have minimal impact, while information effects drive the observed puzzles, resolving key inconsistencies in the literature.