methodology Do Actions Speak Louder Than Words

methodology Do Actions Speak Louder Than Words - MPRA...

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Unformatted text preview: MPRA Munich Personal RePEc Archive Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements Gurkaynak, Refet S, Sack, Brian and Swanson, Eric T UNSPECIFIED 08 February 2005 Online at http://mpra.ub.uni-muenchen.de/820/ MPRA Paper No. 820, posted 07. November 2007 / 01:18 Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements ∗ Refet S. G¨urkaynak, a , c Brian Sack, b and Eric T. Swanson c a Department of Economics, Bilkent University, Ankara, Turkey b Macroeconomic Advisers, LLC, Washington, DC c Division of Monetary Affairs, Federal Reserve Board Washington, DC We investigate the effects of U.S. monetary policy on as- set 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 intra- day 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. JEL Codes: E52, E58, E43, G14. ∗ We thank Ben Bernanke, Ken Kuttner, Jon Faust, Jonathan Wright, two anonymous referees, and seminar participants at Bilkent, Ko¸c, and Sabancı Uni- versities, the Central Bank of Turkey, and the Federal Reserve Bank of San Francisco for valuable discussions, comments, and suggestions. Andrea Surratt and Kunal Gullapalli provided excellent research assistance. The views in this paper, and any errors and omissions, should be regarded as those of the authors, and do not necessarily reflect those of the individuals listed above, the Federal Reserve Board, or any other individual within the Federal Reserve System. Au- thor contact: Refet S. G¨urkaynak, Division of Monetary Affairs, Federal Reserve Board and Department of Economics, Bilkent University, 06800 Ankara, Turkey (e-mail: [email protected]). 55 56 International Journal of Central Banking May 2005 The Federal Reserve’s announcement following its January 28, 2004, policy meeting led to one of the largest reactions in the Trea- sury market on record, with two- and five-year yields jumping 20 and 25 basis points (bp) respectively in the half-hour surrounding the announcement—the largest movements around any Federal Open Market Committee (FOMC) announcement over the fourteen years for which we have data. Even more remarkably, this outsized reac- tion was spurred not by what the FOMC did , but rather by what it said : indeed, the decision to leave the current federal funds rate...
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This note was uploaded on 01/29/2012 for the course ECONOMICS 101 taught by Professor Tikk during the Spring '11 term at University of Toronto.

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methodology Do Actions Speak Louder Than Words - MPRA...

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