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U.S. Monetary Policy Surprises: Identification with Shifts and Rotations in the Term Structure


  • We are grateful to the many people who have provided comments and advice on this paper. We are particularly grateful for comments and suggestions from the editor and two anonymous referees. Claus acknowledges funding from The University of Melbourne Faculty of Economics and Commerce Research Grant. Dungey acknowledges funding from ARC Grant DP0343418.


We develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve. The model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks. A latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks. The approach offers informational advantages over event studies. Results from the U.S. term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock, rather than differing reactions to the same policy shock.