The Time-Varying Effect of US Monetary Policy Shocks on Asset Prices and the Macroeconomy

I explore the time-varying effects of the multi-dimensional aspect of monetary policy on asset prices and macroeconomic variables using a time-varying factor-augmented vector autoregressive model. I decompose monetary policy into three dimensions: current monetary policy stance, FOMC communication about the economic outlook, and forward guidance. The results indicate that the current monetary policy stance has larger effects on stock prices, volatility and economic policy uncertainty, and other variables such as production and ISM survey measures during the recessions. Forward guidance has stronger effects on most variables during 2011-2014 when FOMC adopted calendar-based and threshold-based forward guidance types. Based on the variance decomposition analysis, the current monetary policy stance explains the largest variability in the variables during different periods. Meanwhile, forward guidance accounts for a non-negligible part of the variability in 2-year yields, stock prices, production, and inflation during 2011-2014. In contrast, the economic outlook has little importance for the variability of variables