Can We Use High-Frequency Yield Data to Better Understand the Effects of Monetary Policy and Its Communication? Yes and No!

Abstract

We examine the effects of three facets of monetary policy in Australia using high-frequency yield changes around RBA announcements: current policy; signalling/forward guidance; and changes in premia. Shocks to current policy have similar effects to those identified using conventional approaches, but the effects of signalling and premia shocks are imprecisely estimated. Still, the approach provides evidence that: forward guidance shocks raised future rate expectations in the mid-2010s as the RBA highlighted housing risks; Covid-era policy mainly affected term premia, unlike pre-COVID policy; shocks to the expected path of rates are predictable, suggesting markets misunderstand the RBA’s reaction to data.

Keywords: high-frequency data, affine term structure model, multidimensional policy shocks, monetary policy transmission

JEL Classification: E43, E52, E58, C58