Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements

43 Pages Posted: 19 Dec 2004

See all articles by Refet S. Gürkaynak

Refet S. Gürkaynak

Bilkent University - Department of Economics

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section

Eric T. Swanson

University of California, Irvine - Department of Economics

Date Written: November 2004

Abstract

We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor - changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a current federal funds rate target factor and a future path of policy factor, with the latter closely associated with FOMC statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday dataset going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

Keywords: Measuring monetary policy surprises, FOMC statement, factor models, assest prices

JEL Classification: E43, E44, E52, E58

Suggested Citation

Gürkaynak, Refet S. and Sack, Brian P. and Swanson, Eric T., Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements (November 2004). Available at SSRN: https://ssrn.com/abstract=633281 or http://dx.doi.org/10.2139/ssrn.633281

Refet S. Gürkaynak (Contact Author)

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey

Brian P. Sack

Board of Governors of the Federal Reserve - Monetary and Financial Market Analysis Section ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-736-5671 (Phone)
202-452-2301 (Fax)

Eric T. Swanson

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
3151 Social Science Plaza
Irvine, CA 92697-5100
United States
(949) 824-8305 (Phone)

HOME PAGE: http://www.ericswanson.org

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