High-Frequency Instruments with Time-Varying Reliability: Understanding Identification in Macroeconomics

The effects of monetary policy shocks are regularly estimated using high-frequency surprises in asset prices around central bank meetings as an instrument. These studies, insofar as they explicitly model the relationship between instrument and structural shock, assume a constant relationship between the instrument and the monetary policy shock. By allowing for time variation in this relationship, we show that only a few distinct periods are informative about monetary policy shocks. Therefore, we build a narrative for instrument-based identification. For the instrument in Gertler and Karadi, the effect on the (log) price level is almost 50% larger than the standard specification would suggest.