Working Paper: NBER ID: w31259
Authors: Valentin Haddad; Alan Moreira; Tyler Muir
Abstract: At the announcement of a new policy, agents form a view of state-contingent policy actions and impact. We develop a method to estimate this state-contingent perception and implement it for many asset-purchase interventions worldwide. Expectations of larger support in bad states—“policy puts”—explain a large fraction of the announcements’ impact. For example, when the Fed introduced purchases of corporate bonds in March 2020, markets expected five times more price support had conditions worsened relative to the median scenario. Perceived promises of additional support in bad states persistently distort asset prices, risk, and the response to future announcements.
Keywords: conditional policy; asset prices; central bank interventions; market expectations; financial stabilization
JEL Codes: E50; G00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's announcements of corporate bond purchases (E52) | bond prices recovery (G12) |
| expectation of larger interventions in adverse economic states (E65) | bond prices recovery (G12) |
| policy announcements (E60) | market expectations (D84) |
| perceived commitment to intervene (D70) | long-lasting effects on market dynamics (D40) |
| presence of conditional promises (D86) | moral hazard concerns (G52) |
| conditional policy promises (G52) | asymmetric price support (P22) |
| price support function in adverse states (E64) | higher price support function (E64) |