Working Paper: CEPR ID: DP12970
Authors: Matteo Leombroni; Andrea Vedolin; Gyuri Venter; Paul Whelan
Abstract: Using the institutional features of ECB monetary policy announcements, we provide direct evidence for the risk premium channel of central bank communication. We show that on days when the ECB announces its monetary policy almost all of the variation of bond yields is drivenby communication. Moreover, while the effect of monetary policy is homogeneous across countries before the European debt crisis, we document dramatic differences post crisis and show that communication shocks drive a wedge between peripheral and core yields. We empirically link the periphery-core wedge to break-up and credit risk premia, and study this channel theoretically through the lens of an equilibrium model in which central bank communication reveals information about the state of the economy.
Keywords: interest rates; monetary policy; central bank communication; risk premia; eurozone
JEL Codes: E42; E58; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB communication shocks (E58) | bond yields (E43) |
| communication shocks (L96) | risk premium (G19) |
| communication shocks (L96) | peripheral and core yields (R15) |
| communication shocks (L96) | breakup and credit risk premia (E44) |
| communication shocks (L96) | changes in market expectations (D84) |