Abstract
We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices' responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event-Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area.
Highlights
Monetary policy, for better or worse, has been on the forefront of cyclical policymaking in the past two decades, especially during the Great Recession and the sovereign debt crisis
Monetary policy surprises in the euro area are multi-dimensional â we show the existence of perceived policy Target, Timing, Forward Guidance, and Quantitative Easing (QE) surprises â they are revealed in a multi-step structure
In studying the asset price responses to QE, we are able to condition on the size of the surprises rather than only on a binary variable that shows when a QE announcement took place. This allows for a substantially more precise understanding of QE effects and helps distinguish QE from Forward Guidance surprises, which were frequent during the Zero Lower Bound (ZLB) period.1. We find that both QE and Forward Guidance surprises are active in the press conference window and that while Forward Guidance affected the middle of the yield curve most heavily, with a peak effect at about two years, QE effects get larger as maturity increases, peaking at the 10-year maturity
Summary
For better or worse, has been on the forefront of cyclical policymaking in the past two decades, especially during the Great Recession and the sovereign debt crisis. We study the effects of ECB policy surprises on different sovereign yields, exchange rates, and stock prices Some of these were studied previously in the literature using the combined press release and press conference windows (such as Andrade and Ferroni, 2016) and in the separate windows but not including the QE surprises in the analysis (such as Brand et al, 2010 and Leombroni et al, 2017). In the limited cases where both the event window coverage and the monetary policy surprise definitions overlap with the existing literature, our findings are in line with what is already knownâsuch as effects of Target surprises that are significant for the short end of the yield curveâand instills confidence for the new results we report on the difference between Timing and Forward Guidance, on the effects of QE, on persistence of these effects, on information and stock market reactions,.
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