Does Anyone Listen When Politicians Talk? The Effect of Political Commentaries on Policy Rate Decisions and Expectations

39 Pages Posted: 12 Aug 2016

See all articles by Selva Demiralp

Selva Demiralp

Koc University - Department of Economics

Sharmila King

University of the Pacific (UOP) - Department of Economics

Chiara Scotti

Board of Governors of the Federal Reserve System

Date Written: 2016-06

Abstract

This paper investigates the effects of political commentaries on policy rate decisions and policy expectations in the United States and the euro area. The results suggest that political commentaries do influence policy rate expectations in both regions, even after controlling for macroeconomic releases and immediate interest rate expectations. The findings regarding the policy reaction functions reveal that market expectations are mostly rational. There is no evidence that the Federal Reserve responds to political commentaries that suggest rate hikes or easings. Meanwhile, the European Central Bank seems to have steered its policy in line with political commentaries that suggested further easings during the pre-crisis period, consistent with market expectations.

Keywords: Central bank independence, Market expectations, Unconventional policy

Suggested Citation

Demiralp, Selva and King, Sharmila and Scotti, Chiara, Does Anyone Listen When Politicians Talk? The Effect of Political Commentaries on Policy Rate Decisions and Expectations (2016-06). FEDS Working Paper No. 2016-058, Available at SSRN: https://ssrn.com/abstract=2822183 or http://dx.doi.org/10.17016/FEDS.2016.058

Selva Demiralp (Contact Author)

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

Sharmila King

University of the Pacific (UOP) - Department of Economics ( email )

Stockton, CA 95211
United States

Chiara Scotti

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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