Gurkaynak, Refet S and Sack, Brian and Swanson, Eric T (2005): Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements. Published in: International Journal of Central Banking , Vol. Volume, No. Number 1 (13 June 2005): pp. 55-93.
Download (393kB) | Preview
We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.
|Item Type:||MPRA Paper|
|Original Title:||Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements|
|Keywords:||Monetary Policy; Asset Prices; Factor Analysis; Multi-dimensional Policy|
|Subjects:||G - Financial Economics > G0 - General > G00 - General
G - Financial Economics > G0 - General
|Depositing User:||Terry Woodard|
|Date Deposited:||21 Nov 2006|
|Last Modified:||03 Feb 2016 14:37|
Bernanke, Ben, and Kenneth Kuttner. Forthcoming. “What Explains the Stock Market’s Reaction to Federal Reserve Policy?” Journal of Finance.
Bernanke, Ben, Vincent Reinhart, and Brian Sack. 2004. “Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment.” Brookings Papers on Economic Activity 2:1–100.
Cochrane, John, and Monika Piazzesi. 2002. “The Fed and Interest Rates: A High Frequency Identification.” American Economic Review Papers and Proceedings 92:90–101.
Cook, Timothy, and Thomas Hahn. 1989. “The Effect of Changes in the Federal Funds Rate Target on Market Interest Rates in the 1970s.” Journal of Monetary Economics 24:331–51.
Cragg, John G., and Stephen G. Donald. 1997. “Inferring the Rank of a Matrix.” Journal of Econometrics 76:223–50.
Eggertsson, Gauti, and Michael Woodford. 2003. “The Zero Bound on Short-Term Interest Rates and Optimal Monetary Policy.” Brookings Papers on Economic Activity 1:139–211.
Ellingsen, Tore, and Ulf Soderstrom. 2003. “Monetary Policy and the Bond Market.” Unpublished Manuscript, Bocconi University.
Evans, Charles, and David Marshall. 1998. “Monetary Policy and the Term Structure of Nominal Interest Rates: Evidence and Theory.” Carnegie-Rochester Conference Series on Public Policy 49:53–111.
Faust, Jon, Eric Swanson, and Jonathan Wright. 2004a. “Identifying VARs Based on High-Frequency Futures Data.” Journal of Monetary Economics 51 (6): 1077–1317.
Faust, Jon, Eric Swanson, and Jonathan Wright. 2004b. “Do Federal Reserve Policy Surprises Reveal Superior Information About the Economy?” Contributions to Macroeconomics 4 (1): Article 10.
Gurkaynak, Refet. 2005. “Using Federal Funds Futures Contracts for Monetary Policy Analysis.” Working Paper, Federal Reserve Board.
Gurkaynak, Refet, Brian Sack, and Eric Swanson. 2002. “Market- Based Measures of Monetary Policy Expectations.” Federal Reserve Board Finance and Economics Discussion Series 2002-40.
Gurkaynak, Refet, Brian Sack, and Eric Swanson. Forthcoming. “The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models.” American Economic Review.
Ip, Greg. 2004. “Fed Clears Way For Future Rise In Interest Rates.” The Wall Street Journal, January 29, A1.
Kohn, Donald, and Brian Sack. 2004. “Central Bank Talk: Does It Matter and Why?” In Macroeconomics, Monetary Policy, and Financial Stability. Ottawa: Bank of Canada.
Krueger, Joel T., and Kenneth N. Kuttner. 1996. “The Fed Funds Futures Rate as a Predictor of Federal Reserve Policy.” Journal of Futures Markets 16:865–79.
Kuttner, Kenneth. 2001. “Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market.” Journal of Monetary Economics, 523–44.
Kuttner, Kenneth. 2003. “The Revelation of Funds Rate Changes, 1989-92: What Did the Markets Know and When Did They Know It?” Unpublished Manuscript, Oberlin College.
Leeper, Eric, Christopher Sims, and Tao Zha. 1996. “What Does Monetary Policy Do?” Brookings Papers on Economic Activity 2:1–63.
Pesek, William, and Lauren Young. 1994. “Bond Prices Finish Little Changed After Fed Decides to Keep Rates at Their Current Levels.” The Wall Street Journal, December 21,C22.
Piazzesi, Monika, and Eric Swanson. 2004. “Futures Rates as Risk- Adjusted Forecasts of Monetary Policy.” NBER Working Paper No. 10547.
Reifschneider, David, and John Williams. 2000. “Three Lessons for Monetary Policy in a Low-Inflation Era.” Journal of Money,Credit, and Banking 32:936–66.
Rigobon, Roberto, and Brian Sack. 2004. “The Impact of Monetary Policy on Asset Prices.” Journal of Monetary Economics 51:1553–75.
Rigobon, Roberto, and Brian Sack. 2003. “Measuring the Reaction of Monetary Policy to the Stock Market.” Quarterly Journal of Economics 118:639–69.
Romer, Christina, and David Romer. 2000. “Federal Reserve Information and the Behavior of Interest Rates.” American Economic Review 90:429–57.
Rudebusch, Glenn. 1998. “Do Measures of Monetary Policy in a VAR Make Sense?” International Economic Review 39:907–31.
Shiller, Robert, John Campbell, and Kermit Schoenholtz. 1983. “Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates.” Brookings Papers on Economic Activity 1:173–217.