Unconventional Monetary Policy Announcements Research Articles

Euro area monetary policy effects. Does the shape of the yield curve matter?

This paper investigates the effects of monetary policy in the euro area. We make three contributions to the literature. The first is to use the information from movements in the entire yield curve around monetary policy events to shed light on the efficacy of monetary policy. The second contribution is to provide a novel and easy-to-update database of surprises based on intra-day quotes of Euro Area OIS forward rates and sovereign yields of France, Germany, Italy and Spain. Our third contribution is to show that how the term structure of interest rates changes in response to conventional and unconventional monetary policy announcements matters in shaping the response of key macroeconomic variables.

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.

Unconventional Monetary Policy and the Behavior of Shorts

AbstractWe investigate the behavior of shorts, considered sophisticated investors, before and after a set of Federal Reserve unconventional monetary policy announcements that spot bond markets did not fully anticipate. Short interest in agency securities systematically predicts bond price changes and other asset returns on the days of monetary announcements, particularly when growth or monetary news is released, indicating shorts correctly anticipate these surprises. Shorts also systematically rebalance after announcements in the direction of the announcement surprise when the announcement releases monetary or growth news, suggesting that shorts interpret these announcements to imply further yield changes in the same direction.

The Impact of ECB’s Unconventional Monetary Policy on the German Stock Market Volatility

Abstract This study investigated the reaction of German stock market volatility (Dax index) to the European Central Bank (ECB)’s unconventional monetary policy (UMP) announcements. The financial crisis of 2008 proved that the traditional monetary policy’s tool (the short -term interest rate) has lost its effectiveness to meet the new challenges. So, the key central banks, ECB included, had to implement the new, untested and nonstandard monetary policy which so called unconventional monetary policy. In this study, we used the ECB’s shadow policy rate approach to extract unconventional monetary policy. Also, We employed GJR GARCH (p,o,q) model to estimate the volatility in the German stock market. Then we calibrated both OLS (linear regression) and Markov-switching (probability-matrix of regime changes) models to examine the reaction of German stock returns volatility to UMP announcement by ECB for a period from January 2006 to December 2019. The results delivered by both models showed that the ECB’s UMP had a strong and negative effect on the volatility of the German stock market. Also, both models showed that the past German stock volatility has a significant and negative effect on the dependent variable, while the volatility of the German stock returns is a function of the global volatility estimated by the VIX index. Moreover, the results showed that the Markov-switching regression model provides a better illustration of the stock market volatility impact of UMP than the OLS model because it can represent the changes into the two different regimes named ordinary regime and quantitative easing (crisis) regime. Furthermore, under the Markov-switching regression model, we can see how the output gap and the inflation gap influence the volatility of the Dax index, while the results of the OLS regression model showed that there is no significant relationship between the output gap and the inflation gap with the German stock market volatility.

The Spillover Effects of US Unconventional Monetary Policy on the Taiwanese Economy

Due to the severity of the 2007-2009 financial crisis, the United States Federal Reserve aggressively lowered the policy rate to zero and adopted several “unconventional” monetary policies, including “Quantitative Easing (QE).” The literature has long suggested that US monetary policies had strong spillover effects on foreign countries. Accordingly, the governor of Taiwan's central bank, Dr. Fai-Nan Perng, expressed strong concerns about such ripple effects of US policy on the Taiwanese economy. This paper follows Ammer et al. (2016) to use the Federal Reserve's unconventional monetary policy announcements to support the claim that US monetary policy has significant impacts on the Taiwanese economy and financial markets. Also, the spillover effects of pre-crisis “traditional” monetary policies are compared with the spillover effects from implementing “unconventional” policies during and post-crisis. The results show that US monetary policies exert significant impacts on the Taiwanese economy. Finally, we discuss the response of Taiwan's central bank to these spillover effects.

Is the ECB’s conventional monetary policy state‐dependent? An event study approach

AbstractWe investigate the impact of ECB conventional (CMP) on national banking indices of 10 Eurozone countries and a Eurozone‐wide banking index using the event study technique. We find that announcements of unexpected increases in interest rates benefit French, German, Greek and Italian banks when interest rates are low, while in other periods, the effect is muted. A plausible explanation is that bank profits are squeezed when interest rates are low because banks are reluctant to push deposit rates to zero. Our results are robust to potentially confounding events related to unconventional monetary policy announcements, volatility clustering and volatility expectations.

Price effects of unconventional monetary policy announcements on European securities markets

This paper assesses the effects of the unconventional monetary policies taken by the European Central Bank, the Bank of England and the Federal Reserve on European securities markets. Using the event study methodology, we evaluate the price reaction of market indices around the announcement dates from 2008 to 2018. Our results show that the impact is mixed on European government bonds, but positive and significant on stocks, with some evidence of international spillovers. We also find that coordinated policy actions exert a stronger influence than individual measures. Furthermore, the announcements generate surprise effects, albeit with a different magnitude and direction.

Portfolio investment and U.S. monetary policy announcements: An event study analysis using high-frequency data from Mexico

We study how unconventional monetary policy announcements affected the entry of foreign investment in debt and equity in Mexico, placing special focus on announcements related to the third QE program and the taper tantrum episode. A novel dataset on daily debt and equity flows, that maps Balance of Payments data quite well, allows this paper to provide a better insight into movements of capital. The results suggest that both equity and debt flows reacted immediately to unexpected U.S. monetary policy announcements, particularly if these are considered as bad news by investors. In turn, results using weekly data support the idea that investors interested in fixed income instruments move more prudently than those interested in equity which react quickly.

Unconventional monetary policy announcements and information shocks in the U.S.

We study unconventional policy shocks and information shocks associated with central bank announcements in the U.S. While unconventional policy shocks capture the direct influence of announced monetary policy actions, information shocks are associated with central bank information conveyed with the announcement. To disentangle these two types of shocks, we impose sign restrictions on high frequency changes in interest rates and stock prices around announcements. We find that information shocks lead to persistent declines in the 10-year government bond yield, whereas the actual unconventional policy shock induces only small interest rate responses. We also find that expansionary output effects of unconventional monetary policy are to some extent counteracted by the information shock.

The effects of conventional and unconventional monetary policy on exchange rate volatility

This paper examines the impacts of U.S. conventional and unconventional monetary policy announcements on the volatility of six exchange rates, namely Australian dollar, British pound, Canadian doll...

Euro Area Sovereign Bond Risk Premia During the COVID-19 Pandemic

We decompose euro area sovereign bond yields into five distinct components: i) expected future short-term risk-free rates and a term premium, ii) default risk premium, iii) redenomination risk premium, iv) liquidity risk premium, and a v) segmentation (convenience) premium. Identification is achieved by considering sovereign bond yields jointly with other rates, including sovereign credit default swap spreads with and without redenomination as a credit event feature. We apply our framework to study the impact of European Central Bank (ECB) monetary policy and European Union (E.U.) fiscal policy announcements during the Covid-19 pandemic recession. We find that both monetary and fiscal policy announcements had a pronounced effect on yields, mostly through default, redenomination, and segmentation premia. While the ECB's unconventional monetary policy announcements benefited some (vulnerable) countries more than others, owing to unprecedented flexibility in implementing bond purchases, the E.U.’s fiscal policy announcements lowered yields more uniformly.

Does Wall Street Understand Fed Speak? Monetary Policy Communication and Corporate Conference Calls

We uncover a tone transmission channel of monetary policy wherein the linguistic tone of press releases by the shapes the linguistic tone of macro-related dialogues in corporate conference calls occurring days after such releases. Applying machine-learning techniques to a granular dataset of dialogues between managers and equity analysts during conference calls, we find that the tone of macro-related dialogues is reflected in both contemporaneous stock market reactions as well as subsequent equity analysts' stock recommendations. Critically, the semantic content of monetary policy releases is consistently observed in macro dialogues between managers and analysts. A large sample analysis suggests that the effect of monetary policy tone on corporate conference calls is stronger in more recent years and for major unconventional monetary policy announcements. Taken together, our results shed light on how economic agents interpret Fed Speak,'' underscoring non-transitory effects of monetary policy communication.

A Frequency-Specific Factorization to Identify Commonalities with an Application to the European Bond Markets

AbstractWe propose a frequency-specific framework to link the common features in the multivariate high-frequency price jumps with the low-frequency exogenous factors. We introduce the measure of commonality and the measure of multiplicity based on high-frequency data and define the notions of coarrivals and cojumps to explore the contribution of individual assets. We employ the framework to study the 10-year high-frequency European government bond yields over June 2009–April 2019 as a function of macrofactors, macroannouncements, bond auctions, and unconventional monetary policy announcements. Both idiosyncratic and common jump arrivals are significant, with the idiosyncratic arrivals being more sensitive to financial distress as characterized by a low level of commonality in jump arrivals.

Estimating nominal interest rate expectations: Overnight indexed swaps and the term structure

Abstract No-arbitrage dynamic term structure models (DTSMs) have regularly been used to estimate interest rate expectations and term premia, but are beset by empirical challenges. I propose augmenting DTSMs with overnight indexed swap (OIS) rates to better estimate the decomposition along the term structure at daily frequencies. A Gaussian affine DTSM, augmented with 3 to 24-month OIS rates, generates estimates of US expectations that closely correspond to survey-implied measures out to a 10-year horizon and are more stable across sub-samples, compared to existing models. In addition, I provide narrative evidence, in the form of an event study around US unconventional monetary policy announcements, to further exemplify the benefits from OIS augmentation.

Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies?

We test whether the unconventional monetary policy (UMP) announcements by the Federal Reserve and the European Central Bank represent a risk factor for the hedge fund industry as a whole and for ten commonly used strategies in particular. Using modified event studies and Markov switching models, we find that UMP announcements represent a risk factor for Convertible Arbitrage, Dedicated Short Bias, Emerging Markets, Equity Market Neutral, Fixed Income Arbitrage strategies as well as the Multi-Strategy type. We further test whether UMP announcements have an indirect effect on hedge funds’ performance through breaks in the parameters of the conventional risk factors. Using Chow and Bai-Perron tests, we find that for the industry as a whole and for all strategies, most and Bai-Perron tests, we find that for the industry as a whole and for all strategies, most of the UMP announcements correspond to break dates for the traditional factor loadings.

U.S. unconventional monetary policy and risk tolerance in major currency markets

This paper studies the effects of U.S. unconventional monetary policy announcements on the implied volatility of three major currency pairs, Dollar/Euro, Dollar/British Pound and Dollar/Yen by using panel data analysis along with several model specifications and robustness tests. Monetary policy announcements not only have an effect on the realized behavior of asset prices, but also influence market participants’ expectations regarding future volatility. Our empirical findings show that Federal Reserve’s unconventional monetary policy announcements significantly reduce the market expectations about future realized volatility of exchange rates, suggesting that lax monetary policy leads to elevated risk-tolerance in currency markets. Furthermore, our findings indicate that market participants’ expectations respond differently to the different rounds of U.S. quantitative easing.

Monetary Policy Transmission to Russia and Eastern Europe

In this paper, we argue that the ECB’s unconventional monetary policy announcements have generated significant spillover effects in Russia and Eastern Europe. The hypothesis is tested using OLS estimations of event-based regressions on monetary policy event dummies and seven financial variables in eleven East European countries including Russia. Overall, the empirical results associate the ECB’s unconventional policy announcements with the appreciation of East European currencies, rising stock market indices as well as falling long-term government bond yields and lower sovereign CDS spreads in Eastern Europe and Russia. Bilateral integration with the eurozone is a key determinant of the strength of spillovers, with spillovers strongest in non-euro EU countries and weakest in non-EU East European countries. Furthermore, we find differentiated strength of spillovers to Russia compared to other non-EU East European countries, which we attribute to its fixed exchange rate regime. We also argue for the presence of portfolio rebalancing and confidence transmission channels.

HOW DID UNCONVENTIONAL MONETARY POLICY AFFECT ECONOMIC FORECASTS?

We study how unconventional monetary policy announcements affected professional forecasters' predictions of bond rates, gross domestic product growth and inflation using data from the monthly survey by the Wall Street Journal. We find that unconventional monetary policy (UMP) announcements moved predicted bond rates in the direction the Fed intended. UMP announcements had differential impacts on forecasters' predictions; they also tended to move growth and inflation predictions in directions opposite those the Fed intended due to Fed information effects. A policy implication of our study is that the Fed should communicate economic projections to the public separately from monetary policy announcements to mitigate Fed information effects. (JEL E52, E58)

Unconventional monetary policy spillovers: Evidence from India

Many of the studies on the unconventional monetary policy spillover effects concentrated primarily on the policy announcements of the U.S. Federal Reserve. Using a time series approach, with dummies in the event study framework, this study estimates the monetary policy spillover effects of the unconventional monetary policy announcements of the central banks of four major economic regions: the United States, the United Kingdom, European Central bank, and Japan on the asset prices in India. In addition to that, this study estimates the asymmetry in the responses to positive and negative surprise announcements. The study reveals that unconventional monetary surprises do not have any significant impact on the asset prices in India in a narrow time window.

The effectiveness of unconventional monetary policy announcements in the euro area: An event and econometric study

We use daily data on government bond yields and market-based inflation expectations to measure the announcement effects of unconventional monetary policy announcements in the euro area, focusing on their impact on ex-ante real interest rates. We find evidence of statistically significant effects of several announcements on real interest rates at maturities of two, five and ten years that operate partly through nominal interest rates and partly by raising inflation expectations. Announcements that exceeded market expectations significantly reduced nominal and real interest rates while announcements that disappointed expectations had the opposite effect.