Standard macroeconomic theory predicts rapid responses of asset prices to monetary policy shocks. Small-scale vector autoregressions (VARs), however, often find sluggish and insignificant impact effects. Using the same high-frequency instrument to identify monetary policy shocks, we show that a large-scale dynamic factor model finds overall stronger and quicker asset price reactions compared to a benchmark VAR, both on euro area and US data. Our results suggest that incorporating a sufficiently large information set is crucial to estimate monetary policy effects.
