Nominal Interest Rates and the News
44 Pages Posted: 17 Feb 2009 Last revised: 19 Feb 2014
Date Written: January 16, 2014
This paper provides new estimates of the impact of monetary policy actions and macroeconomic news on the term structure of nominal interest rates. The key novelty is to parsimoniously capture the impact of news on all interest rates using a simple no-arbitrage model. The different types of news are analyzed in a common framework by recognizing their heterogeneity, which allows for a systematic comparison of their effects. This approach leads to novel empirical findings: First, monetary policy causes a substantial amount of volatility in both short-term and long-term interest rates. Second, macroeconomic data surprises have small and mostly insignificant effects on the long end of the term structure. Third, the term-structure response to macroeconomic news is consistent with considerable interest-rate smoothing by the Federal Reserve. Fourth, monetary policy surprises are multidimensional while macroeconomic surprises are one-dimensional.
Keywords: term structure of interest rates, no-arbitrage, news, monetary policy surprises, macroeconomic announcements, policy inertia
JEL Classification: E43, E47, E52, G12
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