Higher-moments-robust monetary policy shocks

This paper develops a novel measure of monetary shocks that accounts for the endogenous response of the Federal Open Market Committee (FOMC) to higher moments of expected economic outcomes. First, I use quantile regression to estimate the conditional distribution of Federal Reserve forecasts and construct indicators of uncertainty and skewness. Second, I show that, unlike other measures proposed in the literature, these indicators have strong predictive power for the changes in the Federal funds rate deliberated by the FOMC. This suggests that point forecasts alone do not fully capture the FOMC’s systematic response to the economic outlook, with implications for the identification of monetary policy shocks. In particular, once higher moments are controlled for, the response of macroeconomic and financial variables is more closely aligned with theoretical predictions.