Working Paper: CEPR ID: DP17432
Authors: Francesco Bianchi; Sydney Ludvigson; Sai Ma
Abstract: We integrate a high-frequency monetary event study into a mixed-frequency macro-finance model and structural estimation. The model and estimation allow for jumps at Fed announcements in investor beliefs, providing granular detail on why markets react to central bank communications. We find that the reasons involve a mix of revisions in investor beliefs about the economic state and/or future regime change in the conduct of monetary policy, and subjective reassessments of financial market risk. However, the structural estimation also finds that much of the causal impact of monetary policy on markets occurs outside of tight windows around policy announcements.
Keywords: beliefs; monetary policy; news; asset pricing
JEL Codes: E7; E27; E32; E17; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Counterfactual scenarios of anticipated Fed actions (E52) | S&P 500 levels (G12) |
| Central bank communications (E52) | Investor beliefs about the economic state and future monetary policy (E66) |
| Investor beliefs about the economic state and future monetary policy (E66) | Market reactions (G10) |
| Perceived probability of future monetary regime changes (E49) | Market volatility (G17) |
| Investor reassessments of economic conditions and risks (G31) | Reaction of financial markets (G19) |
| Investor beliefs about future monetary regime changes (E49) | Variations in stock market risk perceptions (G41) |
| Monetary policy (E52) | Financial markets (G19) |
| Fed's surprise rate cut (E52) | Stock market surge (G10) |