Monetary Policy Announcements Research Articles

Can you hear me now? Identifying the effect of Chinese monetary policy announcements

Do Chinese monetary policy announcements matter? This study evaluates how relevant Chinese monetary policy announcements are to Chinese financial markets and the real side of the economy. Chinese monetary policy is identified by estimating a “target” factor measuring policy surprises and a “path” factor measuring future expectations of policy using price changes to Chinese financial derivatives on policy announcement dates. Local projection results show that 1) Chinese Treasury yields and interbank rates respond persistently, suggesting that policy transmission through an interest-rate channel exists; 2) Equities and exchange rates do not respond to policy announcements instantaneously, but with a lag; 3) Future expectations of Chinese monetary policy play a larger role than surprises, 4) Real variables show evidence of policy transmission, and 5) policy transmission may be sticky due to information frictions.

Herding behaviour and monetary policy: Evidence from the ZAR market

We investigated the presence of herding and its interactions with monetary policy in the ZAR market. We achieved this using both the standard herding tests and Sim and Zhou’s (2015) quantile-on-quantiles regressions. Similar to previous results in other markets, we found that extreme market events mainly drove herding behaviour in the ZAR market. This result was also significant in the presence of monetary policy announcements. However, herding in the ZAR markets was not related to market fads. It, therefore, was, in the main, a rational response to public information, indicating central bank credibility. This credibility gives scope to the central bank to improve communication in periods of market crisis to dampen potential volatility. Further studies on the herding of specific ZAR market participants can be invaluable.

Impacts of Monetary Policy Shocks on Inflation and Output in New Zealand*

We identify monetary policy shocks in New Zealand as 1‐day changes in the whole yield curve around monetary policy announcements. The impacts of these shocks on inflation and output are estimated using functional local projections. We find that the effects of monetary policy shocks are standard in the short run but might be different in the long run. Monetary policy shocks in a small open economy have similar effects as in a large economy, except that unconventional monetary policy announcements have limited impact on long‐term interest rates. Accounting for forward guidance, used in New Zealand since 1997, is important.

The Effects of Conventional and Unconventional Monetary Policy Shocks on US REITs Moments: Evidence from VARs with Functional Shocks

AbstractWe use a vector autoregressive model with functional shocks, capturing the shift of the entire term structure of interest rates on monetary policy announcement dates, to empirically evaluate the effects of conventional and unconventional monetary policy decisions on the Real Estate Investment Trusts (REITs) markets of the United States (US). Using 5-min interval intraday data, we analyze not only the impact on REITs returns, but also its realized variance (RV), realized jumps (RJ), realized skewness (RSK), and realized kurtosis (RKU) over the daily period of September 2008 to June 2021. While the effects of conventional monetary policy shocks on the moments of REITs returns tend to conform with economic theories, the same is not necessarily the case with unconventional monetary policy shocks. In addition, though monetary policy shocks have the most persistent and strongest effects on RJ, the extreme behaviour of the REITs market is also observed through RSK and RKU. Moreover, when we look into 10 REITs sectors, there is indeed heterogeneity in terms of the strength of the effect, but not so much in terms of the sign of responses of the various moments compared to the overall market. Our results have important implications for REITs market participants, given its exponential growth as an asset class.

The impact of monetary policy interventions on banking sector stocks: an empirical investigation of the COVID-19 crisis

The enduring impact of the COVID-19 crisis on the financial sector is undeniable, persisting far beyond the eventual waning of the pandemic. This research examines central bank interventions during the pandemic, using a quantitative event study approach over a five-day window to analyse the impact of 188 monetary policy announcements on banking stocks in China, the U.S., and Europe. Our results demonstrate how monetary policy announcements targeting different economic mechanisms have produced a diverse market reaction throughout the COVID-19 pandemic. Namely, cuts in interest rates and the maintenance of a low interest rate environment by the Federal Reserve resulted in negative abnormal returns in the U.S.A., while short-term announcements surrounding intra-day credit and liquidity provisions boosted banking sector stock prices. In Europe, a muted reaction by the banking sector was observed, with negative abnormal returns observed in response to the ECB’s 2% inflation objectives. Finally, banking stocks in China responded strongly and positively to foreign currency and exchange-related announcements by the People’s Bank of China. The results and insights from this analysis can thus inform preparations made by policymakers, governments, and financial market stakeholders in the event of future waves of COVID-19, or further extreme societal disruptions.

Beneath the surface: The asymmetric effects of unconventional monetary policy on corporate investment

This paper explores the asymmetric effects of unconventional monetary policy on corporate investment in the aftermath of the Great Recession. Using a comprehensive dataset of US listed firms, our research unveils a compelling insight: firms with higher investment irreversibility and market power are less responsive to fluctuations in corporate bond yields following an unconventional monetary policy announcement. These results emphasize the critical importance of taking into consideration firm-specific characteristics when formulating monetary policy, providing valuable insights for central banks aiming to enhance the effectiveness of their policies.

Estimating the Fed’s unconventional policy shocks

Financial market responses to Fed monetary policy announcements are often very small, but sometimes very large and the mix of news contained in these announcements varies over time. I exploit these features of the data to estimate different types of Fed policy shocks. The resulting shocks can be naturally labeled as standard monetary policy, Odyssean forward guidance, large scale asset purchases and Delphic forward guidance. They affect risk-free interest rates, stock prices and the dollar on impact and have delayed but pronounced effects on corporate bond spreads and breakeven inflation rates.

Assessing monetary policy surprises in Japan by high frequency identification

The use of changes in short-term interest rates (STIRs) within 30 min before and after monetary policy announcements, or so-called high-frequency identification (HFI), has been attracting attention as a method of extracting monetary policy surprises. In this paper, we use the Japanese data during the 2000s and 2010s, which includes periods when interest rates hovered around the ELB, to construct an indicator of monetary policy surprises using HFI and document its properties. We find that the STIR futures variations within 30 min around monetary policy announcements are more closely correlated with key financial variables than those outside that window. We also find that the impulse responses of macroeconomic variables to the identified shocks are overall in line with what conventional theory predicts.

Co-Jumping of Treasury Yield Curve Rates

Abstract We study the role of co-jumps in the interest rate futures markets. To disentangle continuous part of quadratic covariation from co-jumps, we localize the co-jumps precisely through wavelet coefficients and identify statistically significant ones. Using high frequency data about U.S. and European yield curves we quantify the effect of co-jumps on their correlation structure. Empirical findings reveal much stronger co-jumping behavior of the U.S. yield curves in comparison to the European one. Further, we connect co-jumping behavior to the monetary policy announcements, and study effect of 103 FOMC and 119 ECB announcements on the identified co-jumps during the period from January 2007 to December 2017.

Do central bank words matter in emerging markets? Evidence from Mexico

This paper analyzes the price and quantity effects of monetary policy statements in an emerging market economy. Surprises in monetary policy are identified using intraday data on asset prices around monetary policy announcements in Mexico. I find that asset prices and the portfolio flows of domestic and foreign investors respond strongly and persistently to both news about the policy rate and guidance about its future path communicated via statements. The ability to manage expectations about future policy via statements is thus not exclusive to central banks in advanced economies and does not require the zero lower bound to be binding.

Classification of RBA monetary policy announcements using ChatGPT

ChatGPT is a tool that has gained much attention and has accelerated the adoption of Artificial Intelligence across many applications. Using monetary policy decisions made by the Reserve Bank of Australia (RBA), we test whether ChatGPT's classifications of monetary policy announcements are consistent with market-observed characteristics, whether this has changed with the update from GPT-3.5 to GPT-4, and whether this provides additional informativeness for changes in the yield implied by interest rate futures. Our results indicate that, regardless of statement readability, ChatGPT provides a classification of hawkish / dovish tone that is consistent with “Target Surprises” and “Path Surprises” and although it seems to improve in the latest version has more difficulty with “sentiment” classification. However, this information does not appear to help to explain changes in interest rate markets on the day of the policy announcement.

Media Treatment of Monetary Policy Surprises and Their Impact on Firms' and Consumers' Expectations

AbstractWe investigate whether monetary policy announcements affect firms' and consumers' expectations by considering their media treatment. We initially use standard monetary policy surprise measures and analyze how the main general newspapers in France report on the announcements. Eighty‐five percent of the monetary policy surprises are either not associated with the newspapers reporting a change in the monetary policy stance or have a sign inconsistent with the media report. Only when we consider media‐consistent monetary policy surprises do we find that consumers and firms respond to monetary policy announcements. The economic tonality of the media reports drives the sign of consumers' response.

Post-FOMC Drift

We study the patterns of stock returns around the Federal Reserve monetary policy announcements. Much of the existing literature interprets changes in short rates around the announcement windows as policy surprises. In contrast, we follow the “Fed information effect” literature, which posits that financial markets react to central bank announcements not just for unexpected changes in monetary policy stances (monetary policy news), but also for central bank’s assessment of economic conditions (non-monetary policy news). We identify the good/bad news using a combination of sign restrictions with high-frequency financial data. “Bad news” events are times when the market interpreted the Fed decisions/announcements as revealing negative Fed information about the economy, and vice versa for “good news” events. A novel finding is that following bad news events, we observe significantly positive stock returns in a 20-day period. This observation is largely consistent with a story of asymmetric effects of good and bad news on the level of uncertainty. Further analysis shows that the post-FOMC drift to economic news in Fed announcements is a market-wide phenomenon. A trading strategy that buys following “bad news” earns an excess return of 2.5% per year with a Sharpe ratio of 0.43.

Flight to Lottery Ahead of FOMC Announcements: Institutional Investors or Retail Investors?

AbstractThis paper studies the pre‐Federal Open Market Committee (FOMC) announcement drift at the stock level. We hypothesize that investors have a higher propensity to speculate before the monetary policy announcements by the FOMC, due to the resolution of uncertainty and associated reduction in investors' fear. Indeed, we find evidence that there exists a drift of lottery‐like stocks in the pre‐FOMC window, when investors' fear gauge is lower, together with higher demand for lottery‐like stocks and higher realized skewness. Moreover, we show that the demand for lottery‐like stocks ahead of FOMC announcements is more prominent among institutional investors than retail investors. Our findings also identify the key role of transient and quasi‐index institutional investors in our documented flight‐to‐lottery effect. Our findings advance the ongoing debates about the role of firms' investor heterogeneity in determining how monetary policy affects corporate managers' decisions. Our paper has important implications for central banks and managers by showing that investors' preference for lottery‐like stocks increases before FOMC announcements.

MONETARY POLICY AND STOCK PRICE BEHAVIOUR OF BANKS IN NIGERIA: A PANEL DYNAMIC CO-INTEGRATION APPROACH

This study was conducted to examine effect of monetary policy on stock prices of listed banks in Nigeria. Specifically, the study examined effects of broad money supply, Treasury bill rate, monetary policy rate, exchange rate, cash reserve ratio, lending rate and savings deposit rate on stock prices of 15 listed banks on the Nigerian Stock Exchange as at 31st December, 2019. The study employed descriptive statistics, panel dynamic ordinary least squares and panel causality analysis to analyze quarterly data of stock price (STP) and monetary policy variables from 2006 to 2019. Results of the panel dynamic ordinary least squares (PDOLS) show that for banks, broad money supply (M2), monetary policy rate (MPR), exchange rate (EXCH) and interest on savings (SDR) significantly affect stock price negatively (p =0.0147; p =0.0000; p = 0.0110 and p = 0.0003 for M2, MPR, EXCH and SDR respectively). Treasury bill rate (TBR) significantly affects stock price positively (p = 0.0000) while cash reserve ratio (CRR) and lending rate (LDR) have insignificant effect on stock prices of banks. We recommend that Nigerian banks should be more pro-active in managing effects of monetary policy announcements to avert prolonged negative effects of such policies on their stock prices. We also advocate a re-appraisal of MP tools vis-à-vis stock market expansion goal by the Central Bank of Nigeria.

Monetary policy and Bitcoin

I empirically study the impact of monetary policy on Bitcoin, and show that is has evolved over time. First, based on high-frequency data, the paper documents that Bitcoin prices did not immediately respond to US monetary policy announcements in the past; they only started doing so in late 2020, in a manner similar to other risky asset prices. Second, based on a structural VAR analysis I study the impact of monetary policy over longer horizons. I confirm the contractionary impact of a US monetary tightening in the post-2020 time period, but show that, historically, a US tightening used to persistently increase rather than decrease Bitcoin prices. To explain this result, I exploit spreads in Bitcoin valuations across currencies and blockchain data and link increased Bitcoin demand to East Asian economies subject to capital controls, particularly China. I discuss implications for the discussion of where demand for Bitcoin stems from: its recent responses to monetary policy confirm its role as a primarily speculative asset; yet, at least historically Bitcoin seems to have derived part if its value from enabling cross-border value transfers and capital flight.

The Announcement Effect of Monetary Policy on the Corporate Bond Markets

This study investigates the impact of the central bank’s monetary policy announcements on the perceptions of yield spread in corporate bond markets under the event of extreme events. These results highlight that the coronavirus pandemic has caused a market panic in the global economy. This caused investors to withdraw their money from bond markets, which caused a liquidity crisis in bond markets. The Fed announcements caused statistically significant tightening on US and global investment grades and high-yield corporate bond spreads. The Euro investment grade and high-yield corporate bond spread narrowed when the Fed took additional actions to provide more funds and expanded the buying scope to support market liquidity. These results suggest that forward guidance that emphasizes the Fed’s monetary policy causes stronger information effects.

Impact of RBI's monetary policy announcements on government bond yields: evidence from the pandemic.

We investigate how the bond market responded to the Reserve Bank of India's (RBI) monetary policy actions undertaken since the start of the pandemic. Our approach involves combining a narrative analysis of the media coverage together with an event-study framework around RBI's monetary policy announcements. We find that the RBI's actions early in the pandemic were helpful in providing an expansionary impulse to the bond market. Specifically, long-term bond interest rates would have been meaningfully higher in the early months of the pandemic if not for the actions undertaken by the RBI. These actions involved unconventional policies providing liquidity support and asset purchases. We find that some of the unconventional monetary policy actions had a substantial signaling channel component where the market perceived the announcement of an unconventional monetary policy action as representing a lower future path for the short-term policy rate. We also find that the RBI's forward guidance was more effective in the pandemic than it had been in the couple of years preceding the pandemic.

The Great Lockdown: Pandemic response policies and bank lending conditions

This study analyses the effects of monetary and prudential policies taken in response to the outbreak of the coronavirus pandemic to support bank lending conditions. More precisely, we focus on the effects of targeted longer-term refinancing operations (TLTROs) and their interaction with supervisory measures taken in the euro area. For identification, we use proprietary data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. We show that, in the absence of the funding cost relief associated with the pandemic response measures, banks’ ability to supply credit would have been severely affected. The results are robust to controlling for other concomitant policy measures such as government guarantees or quantitative easing. Our findings also indicate that the coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. Finally, we find that, while monetary and prudential policies did not promote “zombie” lending and “zombie” firms, in absence of these measures the pandemic would have led to a significantly larger decline in firms’ employment.

Monetary policy as market stabilizer in the COVID-19 pandemic

We categorize expansionary monetary policies based on interest rates, monetary easing, and liquidity decisions. We find that the stock market reacts positively to liquidity policy announcements by a more significant margin during and after the COVID-19 at market and industry levels compared with reactions to interest rate or monetary easing policy announcements. The economic consequences are large and persistent. Using firm characteristics as proxies for monetary policy transmission channels, we find that at firm level, the positive responses to liquidity policy announcements during the crisis are more pronounced for small and medium-sized businesses and non-state-owned enterprises relative to other enterprises.