Monetary policy matters: Evidence from new shocks data

The evidence suggests that monetary policy post 1988 became more forward-looking, invalidating the identifying assumptions in conventional methods of measuring monetary policy's effects, leading to spurious and unlikely results for this period. We propose a new identification scheme that uses factors extracted from Fed Funds futures to measure exogenous changes in policy. Using this shock series in a VAR, we recover the contractionary effect of monetary tightening on output. Moreover, we find that as much as half of the variability in output was driven by monetary policy shocks, and that there is a mild price puzzle. •Conventional methods of identifying monetary shocks seem to have broken down.•We outline a new method of identification based on Fed Funds futures data.•Our method appears more robust for the more recent period.•Monetary policy shocks may account for around half of output volatility.