Deciphering Monetary Policy Shocks

Abstract

We decipher monetary policy shocks by showing that asset price reactions to policy announcements can be directly connected to the verbal communication of the central bank. For the European Central Bank (ECB), we document that asset prices and measures of structural monetary policy shocks respond to news about 'rate guidance', 'economic activity', 'inflation', 'fiscal policy', or 'financial and monetary conditions', which the ECB reveals in its press conferences. The responses of asset prices to topic-specific news are economically intuitive, however, there is no simple mapping between economic drivers and market prices due to substantial time-variation in which topics markets perceive as relevant.

Keywords: Monetary Policy Shocks, Central Bank Communication, Asset Pricing, Textual Analysis

JEL Classification: G10, G12, E43, E44, E52, E58