News and international yield curves
In this paper, Gürkaynak et al. study the joint response of U.S. and Euro Area (EA) yields to both US and EA news. They use high-frequency data that are based on interest rate and bond futures and cover six different maturities, ranging from three months to thirty years. The sample period is from March 2002 to December 2019. They study responses to two types of news: macroeconomic data releases and monetary policy announcements of the U.S. and the EA. For all news, they study yield curve responses over a 20-minute window from 5 minutes before the release to 15 minutes afterward. The only exceptions are central bank announcements that were followed by a press conference. In those cases, their event window starts 5 minutes before the press release and ends 70 minutes after the start of the press conference. They use a new semi-latent factor methodology, where some news is observable and some are not. They find:
- Short yields are affected almost exclusively by news, while long yields owe more of their variance to noise, depending on how firmly inflation expectations are anchored;
- While the ECB was a credible inflation targeter since its inception, the Fed only articulated a numerical inflation target in 2012. Hence, prior to 2012, news played a larger role in driving U.S. long-term yields.
- U.S. news announcements have larger effects than EA announcements, perhaps because the latter is less timely and released in a more staggered way. The authors show that not only are there spillovers from the U.S. to the euro area, but also the other way around, although to a lesser extent.
News and Noise Shaping International Yield Curves
Authors: Refet S. Gürkaynak, , Mark Kerssenfischer, Burçin Kısacıkoğlu, Jonathan H. Wright
From: Bilkent University, Deutsche Bundesbank, Johns Hopkins University
Narratives and monetary policy
In this paper, Romer and Romer ask whether monetary policy matters, and if it does what is another way to identify the channel through which changes in aggregate demand have real effects. They use a technique they termed in their 1989 paper the “narrative approach,” an empirical technique where one gathers systematic evidence from contemporaneous qualitative sources (such as newspapers, government reports, and policy meeting transcripts), and incorporates it into statistical analysis. Is the narrative approach still useful? The authors argue that it does help to deal with omitted variable bias in empirical macroeconomic research since the problem of identification in macroeconomics has not yet been entirely solved.
We read the historical minutes and transcripts of Federal Reserve policymaking meetings to identify significant contractionary and expansionary changes in monetary policy not taken in response to current or prospective developments in real activity for the period 1946 to 2016. We find that such monetary shocks have large and significant effects on unemployment, output, and inflation in the expected directions. Analysis of available policy records suggests that a contractionary monetary shock likely occurred in 2022. Based on the empirical estimates of the effect of previous shocks, one would expect substantial negative impacts on real GDP and inflation in 2023 and 2024.
Does Monetary Policy Matter? The Narrative Approach after 35 Years
Authors: Christina D. Romer, David H. Romer
From: University of California, Berkeley
