A1034
Title: Dancing with the R-star: Information Shocks in the "New Normal"
Authors: Giulia Martorana - Catholic University of the Sacred Heart (Italy) [presenting]
Efrem Castelnuovo - University of Padova (Italy)
Aristotelis Margaris - University of Padova and Lancaster University (Italy)
Abstract: Benigno, Hofmann, Nuo, and Sandri (2024) hypothesize that monetary policy shocks may be behind changes in the real natural interest rate, i.e., R-star. We quantify the impact of information shocks - news about future economic conditions released by the Federal Reserve when announcing its policy decisions - on R-star via an internal instruments VAR approach. We find a statistically significant, economically relevant, and substantially persistent positive impact of expansionary information shocks on R-star. We document evidence consistent with an innovation channel at work transmitting such shocks to the natural interest rate. Working with a longer sample that accounts for pandemic data and a second zero lower-bound episode (on top of the great recession's), we document a significant sign asymmetry, i.e., the business cycle and R-star respond more (less) strongly to information shocks associated with monetary policy easing (tightening). This empirical finding survives the inclusion in the VAR of a variety of macroeconomic indicators that account for the various shocks that hit the US economy during and in the aftermath of the pandemic, including fiscal stress, geopolitical risk, energy disturbances, and global supply chain pressures.
