<p>Monetary policy are all the endogenous actions of the central bank in response to economic conditions. Monetary policy shocks are all the unanticipated actions the central bank takes. To make this more concrete, think of the macroeconomic variables as evolving according to a SVAR:</p>
<p><span class="math-container">$$A_0 X_t = B_1 X_{t-1} + \dots + B_N X_{t-N} + \epsilon_t. $$</span></p>
<p>where <span class="math-container">$X_t$</span> is the vector of relevant (will not unpack this here) macroeconomic variables at time <span class="math-container">$t$</span> and <span class="math-container">$\epsilon_t$</span> are random variables, the structural shocks. Suppose that the only relavant tool for the central bank is the interest rate, <span class="math-container">$i_t$</span>, so that <span class="math-container">$X_t = \begin{bmatrix} i_t \\ \tilde{X_t} \end{bmatrix}$</span> and <span class="math-container">$\epsilon_t = \begin{bmatrix} \epsilon_{i,t} \\ \epsilon_{\tilde{X_t},t} \ \end{bmatrix}.$</span> Notice that for any sequence <span class="math-container">$\{X_k\}_{k=t-N}^{t-1}$</span>, in the absence of structural shocks, we would be able to predict <span class="math-container">$\{X_t\}$</span>, and in particular the actions of the central bank, i.e., the <span class="math-container">$i_t$</span> it would set - this is monetary policy. On the other hand, by design, we would not be able to predict the values of <span class="math-container">$\epsilon_t$</span> since it is a random vector. In particular, we cannot predict with 100% certainty <span class="math-container">$\epsilon_{i,t}$</span> - the monetary policy shocks.</p>

CC BY-SA 4.0
2023-06-25T05:11:35.270Z
Sorry 1 last question. Given the assumption that central bank's only relevant tool is the interest rate, is monetary policy a sequence of the interest rate?
EHMJ
CC BY-SA 4.0
2023-08-25T15:20:38.400Z
Not sure what you are asking tbh. If you mean *Is the announced path of interest rates a monetary policy tool beyond just the contemporaneous target rate?*, the answer is definitely yes, If you mean *in this specific case is $\{i_{t+k}\}_{k\geq0}$ defined as monetary policy?*, yes, with the interpretation given above.
RAGMS
CC BY-SA 4.0
2023-10-02T21:30:56.760Z
Sorry for the late response.  I understand now. Thank you for your time @RAGMS
EHMJ
CC BY-SA 4.0
2023-06-22T14:00:29.387Z
2023-06-22T14:00:29.387Z
RAGMS
<p><em>Monetary policy</em> is just broad term for the policies monetary authorities are pursuing. For example, one could say Fed between 2009 and 2019 was pursuing loose monetary policy (low interest rates, asset purchases, lowering reserve requirements etc). Monetary policy is an umbrella term for policies of monetary authority.</p>
<p><em>Monetary policy shock</em> is said to occur when monetary policy changes significantly without any sufficient advanced warning. You can consider it 'unexpected' change in monetary policy.</p>

CC BY-SA 4.0
2023-06-17T11:51:02.980Z
2023-06-17T11:51:02.980Z
1muflon1
<p>Sorry for a silly question but I must know the answer to the question.</p>
<p>I am asking this because it seems like some people do not</p>
<p>differentiate between monetary policy and monetary policy shock.</p>
<p>For example, in Smets and Wouters (2003)</p>
<p>(link: <a href="https://statmath.wu.ac.at/%7Ehauser/LVs/SE_MacroEconometrics/DSGE/SmetsWouters2003JEuEcoAss_DSGE.pdf" rel="nofollow noreferrer">https://statmath.wu.ac.at/~hauser/LVs/SE_MacroEconometrics/DSGE/SmetsWouters2003JEuEcoAss_DSGE.pdf</a>) page 3, third paragraph reads</p>
<p>&quot;Third, we analyze the effects (and the uncertainty surrounding those effects) of the various structural shocks (which includes monetary policy shock) on the euro area...a temporary monetary policy tightening, associated with a temporary increase in
the nominal and real interest rate, has a hump-shaped negative effect on both
output and inflation as in Peersman and Smets (2001).&quot;</p>
<p>To summarize their paragraph, they looked at the effects of positive monetary policy shock on economy and treating those effects as effects of a temporary monetary policy tightening (or monetary policy tightening) on economy.</p>

<monetary-policy>
What is the difference between monetary policy and monetary policy shock
EHMJ
# What is the difference between monetary policy and monetary policy shock

(Asked by: username_0 on 2023-06-17)

Sorry for a silly question but I must know the answer to the question.

I am asking this because it seems like some people do not

differentiate between monetary policy and monetary policy shock.

For example, in Smets and Wouters (2003)

(link: [https://statmath.wu.ac.at/~hauser/LVs/SE\_MacroEconometrics/DSGE/SmetsWouters2003JEuEcoAss\_DSGE.pdf](https://statmath.wu.ac.at/%7Ehauser/LVs/SE_MacroEconometrics/DSGE/SmetsWouters2003JEuEcoAss_DSGE.pdf)) page 3, third paragraph reads

"Third, we analyze the effects (and the uncertainty surrounding those effects) of the various structural shocks (which includes monetary policy shock) on the euro area...a temporary monetary policy tightening, associated with a temporary increase in
the nominal and real interest rate, has a hump-shaped negative effect on both
output and inflation as in Peersman and Smets (2001)."

To summarize their paragraph, they looked at the effects of positive monetary policy shock on economy and treating those effects as effects of a temporary monetary policy tightening (or monetary policy tightening) on economy.

**Tags:** monetary-policy

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## 2 answers

### Answer by username_1 on 2023-06-22. Score: 1 | Accepted answer

Monetary policy are all the endogenous actions of the central bank in response to economic conditions. Monetary policy shocks are all the unanticipated actions the central bank takes. To make this more concrete, think of the macroeconomic variables as evolving according to a SVAR:

$$A\_0 X\_t = B\_1 X\_{t-1} + \dots + B\_N X\_{t-N} + \epsilon\_t. $$

where $X\_t$ is the vector of relevant (will not unpack this here) macroeconomic variables at time $t$ and $\epsilon\_t$ are random variables, the structural shocks. Suppose that the only relavant tool for the central bank is the interest rate, $i\_t$, so that $X\_t = \begin{bmatrix} i\_t \\ \tilde{X\_t} \end{bmatrix}$ and $\epsilon\_t = \begin{bmatrix} \epsilon\_{i,t} \\ \epsilon\_{\tilde{X\_t},t} \ \end{bmatrix}.$ Notice that for any sequence $\{X\_k\}\_{k=t-N}^{t-1}$, in the absence of structural shocks, we would be able to predict $\{X\_t\}$, and in particular the actions of the central bank, i.e., the $i\_t$ it would set - this is monetary policy. On the other hand, by design, we would not be able to predict the values of $\epsilon\_t$ since it is a random vector. In particular, we cannot predict with 100% certainty $\epsilon\_{i,t}$ - the monetary policy shocks.

> **Comments:**
> **username_0**: Sorry 1 last question. Given the assumption that central bank's only relevant tool is the interest rate, is monetary policy a sequence of the interest rate?  
> **username_1**: Not sure what you are asking tbh. If you mean *Is the announced path of interest rates a monetary policy tool beyond just the contemporaneous target rate?*, the answer is definitely yes, If you mean *in this specific case is $\{i_{t+k}\}_{k\geq0}$ defined as monetary policy?*, yes, with the interpretation given above.  
> **username_0**: Sorry for the late response.  I understand now. Thank you for your time @RAGMS  

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### Answer by username_2 on 2023-06-17. Score: 1

*Monetary policy* is just broad term for the policies monetary authorities are pursuing. For example, one could say Fed between 2009 and 2019 was pursuing loose monetary policy (low interest rates, asset purchases, lowering reserve requirements etc). Monetary policy is an umbrella term for policies of monetary authority.

*Monetary policy shock* is said to occur when monetary policy changes significantly without any sufficient advanced warning. You can consider it 'unexpected' change in monetary policy.


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