Central Bank Communication and the Yield Curve
66 Pages Posted: 22 Nov 2016 Last revised: 2 Nov 2018
Date Written: October 31, 2018
Using the institutional features of ECB monetary policy announcements, we provide evidence for the risk premium channel of central bank communication. While central bank communication had a homogeneous effect across Euro-area sovereign bond yields before the European debt crisis, it drove a wedge between peripheral and core yields afterwards. Guided by the predictions of a theoretical model in which central bank communication reveals information about the state of the economy, we empirically link the periphery-core wedge to break-up and credit risk premia, and show that equity response to shocks can identify the strength of this risk premium channel.
Keywords: interest rates, monetary policy, central bank communication, risk premia, Eurozone
JEL Classification: E43, E58, G12
Suggested Citation: Suggested Citation