Title: Central bank signaling matters: Evidence from the sensitivity of financial variables to macroeconomic news
Authors: Gabriele Ciminelli - International Monetary Fund and University of Amsterdam (United States) [presenting]
Abstract: Two strands of the literature study how financial variables react to (i) macroeconomic news and (ii) unconventional monetary policy announcements. We go a step further and investigate whether the sensitivity of domestic financial variables to US labor market news changed following unconventional monetary policy announcements by the Federal Reserve. The results indicate that this was indeed the case. Following the introduction of calendar-based forward guidance, data indicating higher than expected job creation led to a significant steepening of the yield curve and a marked increase of inflation expectations. Conversely, after Bernanke's Taper Tantrum the same data caused a hump-shaped reaction of the yield curve and no movement in expected inflation. We interpret these findings as suggestive evidence pointing to the existence of a signaling channel of monetary policy. Understanding how this channel works is crucial to explain the reaction of financial variables to news.