Working Paper: NBER ID: w30072
Authors: Francesco Bianchi; Sydney C. 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: Monetary Policy; Asset Pricing; Investor Beliefs; Structural Estimation
JEL Codes: E52; E58; E7; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy announcements (E60) | shifts in investor beliefs about the economic state (D84) |
| Monetary policy announcements (E60) | perceived sources of economic risk (P34) |
| Monetary policy announcements (E60) | future monetary policy conduct (E60) |
| Revisions in beliefs about the economic state (E65) | stock market reactions (G10) |
| Decreased perceptions of financial market liquidity premia (G19) | stock market surge (G10) |
| Increased expectations of aggregate demand (E19) | stock market surge (G10) |
| Fluctuating beliefs about future monetary policy (E39) | market volatility (G17) |
| Counterfactual beliefs about monetary regime changes (E19) | stock market valuations (G10) |
| Monetary policy announcements (E60) | market reactions (G10) |
| Investor expectations (D84) | market outcomes (P42) |