Deconstruction of Monetary Surprises and the Information Effect: A Case of Australia

Abstract

Monetary policies surprises extracted from high-frequency data are a common instrument used to study the impact of monetary policy. It is often found that these shocks have ‘counter-intuitive’ effects, which are not explained by conventional interest rate transmission mechanisms. Following Jarocinski and Karadi (2020), I decompose high-frequency surprises in the 1-month Overnight Indexed Swap (OIS) into two distinct shocks, a central bank information shock and a classic monetary policy shock. By tracing their co-movements with high-frequency surprises in stock prices using a sign-restriction identification technique in SVAR model, I find evidence for both a central bank information shock and a ‘RBA information effect’, which functions by informing the public sector about the current state of the economy rather than tightening or loosening policy. The two effects have comparable impacts on a variety of macroeconomic variables. Controlling for the information effect somewhat mitigates the price puzzle.