Talking Less and Moving the Market More: Evidence from the ECB and the Fed

31 Pages Posted: 19 Dec 2010

See all articles by Carlo Rosa

Carlo Rosa

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: December 10, 2010

Abstract

This paper examines and compares the communication strategies of the Federal Reserve and the European Central Bank, and their effectiveness. First, we find that the surprise components of both monetary policy actions and statements have important but differing effects on asset prices, with unexpected communication having a much greater impact on longer-term interest rates. Second, both the ECB and the Fed have proven to be equally successful in moving their domestic asset prices using either monetary policy or news shocks. However, the response of the American yield curve to the surprise component of Fed's statements is larger than the reaction of the European term structure to ECB's announcements. This result is intimately related to the amplitude of the policy rate cycle that is much larger in the US than in the euro area combined with the bounded support of the news shock. Third, we analyze the cross-effects and show that the Fed has been more able to move the European interest rates of all maturities than the ECB to move American rates. This finding is tied to the predominance of dollar fixed income assets rather than to an attempt of the ECB to mimic the Fed.

Suggested Citation

Rosa, Carlo, Talking Less and Moving the Market More: Evidence from the ECB and the Fed (December 10, 2010). Scottish Journal of Political Economy, Vol. 58, Issue 1, pp. 51-81, 2010. Available at SSRN: https://ssrn.com/abstract=1727897 or http://dx.doi.org/10.1111/j.1467-9485.2010.00536.x

Carlo Rosa (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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