Central Bank Communication and the Yield Curve
85 Pages Posted: 22 Nov 2016 Last revised: 15 Jun 2020
Date Written: June 9, 2020
In this paper, we argue that monetary policy in the form of central bank communication can shape long-term interest rates by changing risk premia. Using high-frequency movements of default-free rates and equity, we show that monetary policy communications by the European Central Bank on regular announcement days led to a signicant yield spread between peripheral and core countries during the European sovereign debt crisis by increasing credit risk premia. We also show that central bank communication has a powerful impact on the yield curve outside regular monetary policy days. We interpret these findings through the lens of a model linking information embedded in central bank communication to sovereign yields.
Keywords: interest rates, monetary policy, central bank communication, risk premia, Eurozone
JEL Classification: E43, E58, G12
Suggested Citation: Suggested Citation