30
Communications Breakdown: The Transmission
of Di�erent types of ECB Policy Announcements
Andrew Kane, John H. Rogers and Bo Sun
April 27, 2018
1 / 27
Background
I Large literature using high-frequency changes in bond pricesaround Central Bank announcements to capture monetarypolicy surprises
I thus useful in identifying monetary policy shocksI Kuttner (2001), Cochrane and Piazzesi (2002), Gurkayanak,
Sack and Swanson (2005), Gertler and Karadi (2015)
I However, information on the economy released during theseannouncements complicates this interpretation.
I \Fed information e�ect"I Romer and Romer (2000), Nakamura and Steinsson (2017),
Campbell et. al. (2010, 2012)I forecasted (and perhaps realized) GDP response could be
perverse
I We explore theses issues for ECB announcements.
2 / 27
Outline of Our Paper
I How are di�erent types of ECB policy shocks transmitted?
I Is there a central bank information e�ect, and if so how toidentify it?
I Where does it appear?I Asset Prices?I Private sector forecasts of GDP, in ation?I Response to policy shocks?
I What is its source?I Changes in the policy rate?I The statement?I Other communication?
I Is the information e�ect related to uncertainty about
monetary policy?
3 / 27
Identi�cation of ECB Monetary Policy Shocks
Periphery-Core bond yield spread our instrument
I \Preserve the euro" objective
Target Rate Window
I Short statement released at conclusion of GC meeting
I Decision on immediate monetary policy
Communications Window
I Press conference after statement release
I Forward guidance, economic outlook
4 / 27
Figure: ECB Communication and Macroeconomic Data Forecast Timeline
Target Rate Window Communications Window
Decision Released Press Conference Begins
1:30 2:25 3:20
Private Forecast Made ECB Meeting (their outlook revealed) Data Release
5 / 27
Rubric
www.ecb.europa.eu ©
•Monetary policy
Introductory statement of the March Governing Council Meeting
Forward guidance on ECB interest rates:
“We continue to expect them [ECB interest rates] to remain at their present levels for an extended
period of time, and well past the horizon of out net asset purchases.”
Net purchases:
“We confirm that our net asset purchases, at the current monthly pace of €30 billion, are intended to
run until the end of September 2018, or beyond, if necessary, and in any case until the Governing
Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”
Reinvestment:
“The Eurosystem will continue to reinvest the principal payments from maturing securities purchased
under the asset purchase programme for an extended period of time after the end of its net asset
purchases, and in any case for as long as necessary.”
25
6 / 27
Figure: Intraday Italian-German Spread Movements
2000 2005 2010 2015
−0.
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−0.
10.
00.
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2
Sur
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alue
Italy−Germany 2−Year Spread High−Frequency Change Around Various ECB Communications
TargetMeeting CommunicationIntermeeting Communication
Target Window: 13:30−14:25 Communication Window: 14:25−15:30
OMT introduced
SMP for Italy and Spain
7 / 27
Information Surprises
I Examine changes in (i) actual data (GDP growth, 1-yr
ahead), (ii) private sector expectations, and (iii) ECB outlook
around ECB announcements.
I Regress private forecast error on ECB forecast error
I Residual captures what the central bank knew about the
economy that the private sector did not:
(data��privateforecast�;t��) = �0+�1(data��ecbforecast�;t)+!t
I � : Release date of series being forecasted
I t: Date of ECB forecast
I t� �: Date of private forecast before ECB forecast at t
I !: Information surprise. Negative values indicate CB
pessimism surprise
8 / 27
Figure: Private Sector Forecast Change vs ECB Forecast Change
GDP nowcasts GDP 1-year ahead forecasts
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Correlation: 0.38
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Correlation: 0.44
Changes in individual private sector forecasts vs changes in ECB forecasts. For
each ECB meeting, the private sector change in the forecast around that
meeting is the di�erence between the �rst forecast survey after that meeting
and the last forecast survey before the meeting. Private forecast changes were
computed monthly. ECB forecast changes were computed quarterly.
9 / 27
Figure: Information Surprises
−0.
6−
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20.
00.
20.
4
Info
rmat
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surp
rise
2008 2010 2012 2014 2016
9 / 27
\Preserve the euro" e�ect?
High-frequency responses of exchange rate and bond yield spreads
relative to Germany
I narrowing spreads coincide with euro appreciation, especially
in communications window
I e�ect stronger for "more peripheral" countries
I opposite relationship for Fed policy changes and the dollar
10 / 27
Figure: Change in 2-Yr IT-DE Spread and Exchange Rate
Target Rate Window Communications Window
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/EU
R
−0.24
11 / 27
Figure: Change in 2-Yr Interest Rate Spread and Exchange Rate
Italy Ireland
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−0.1 0.0 0.1 0.2 0.3
−0.
015
−0.
005
0.00
50.
010
0.01
5
Change in spread
Cha
nge
in U
SD
/EU
R−0.24
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−0.1 0.0 0.1 0.2 0.3 0.4 0.5
−0.
015
−0.
005
0.00
50.
010
0.01
5
Change in spread
Cha
nge
in U
SD
/EU
R
−0.29
France Austria
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−0.10 −0.05 0.00 0.05
−0.
015
−0.
005
0.00
50.
010
0.01
5
Change in spread
Cha
nge
in U
SD
/EU
R
−0.13
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−0.10 −0.05 0.00 0.05 0.10
−0.
015
−0.
005
0.00
50.
010
0.01
5
Change in spread
Cha
nge
in U
SD
/EU
R−0.06
12 / 27
Estimate external instruments VARs
I VAR in monthly data: A(L)Yt = "t
I Yt = IP;CPI; spread; dollar=euro; ebp
I 2008:1 to 2017:4
I Errors: "t = R�t; �t = (�1t; �0
2t)0:
I De�ne Zt as intraday change in, e.g., two-year futures during
communications window
I set Xt = "t for variables with only monthly data (do withmacro data)
I Implementation: estimate reduced form VAR and get
residuals. Regress Xt on Zt to get R1 up to a sign and scale
13 / 27
External instruments identi�cation, cont'd
I Key Assumps: E(�1tZt) = � , E(�2tZt) = 0
I Identifying assumptions seem mild
I no timing restrictions, dubious or otherwise, no signrestrictions
I however, FRB-CH brethren, Nakamura-Steinsson, and othersraise concerns
I \Fed" information e�ect
I suggests violation of 2nd assumption
14 / 27
Decomposing Monetary Policy Surprises
I Regress raw high-frequency surprises on ECB and private
sector forecast errors
�MPSm;t = �0 + �1ecbforecasterror�;t
+ �2privateforecasterror�;t�� + �t
I m either target window or communications window
I restrict �1 = ��2
I private forecasts those made before ECB meeting
I �tted values are the Delphic Guidance surprises
I residuals �t are orthogonalized MP surprises
15 / 27
Figure: Orthogonalized Monetary Policy Shocks and Delphic GuidanceShocks
Orthogonalized Target Rate Orthogonalized Communication−
0.1
5−
0.1
0−
0.0
50
.00
0.0
50
.10
0.1
5
Date
Ch
an
ge
in
Sp
rea
d
2008 2009 2010 2011 2012 2013 2014 2015 2016
−0
.15
−0
.10
−0
.05
0.0
00
.05
0.1
00
.15
Date
Ch
an
ge
in
Sp
rea
d
2008 2009 2010 2011 2012 2013 2014 2015 2016
Delphic Target Rate Delphic Communication
−0
.02
−0
.01
0.0
00
.01
0.0
2
Date
Ch
an
ge
in
Sp
rea
d
2008 2009 2010 2011 2012 2013 2014 2015 2016
−0
.02
−0
.01
0.0
00
.01
0.0
2
Date
Ch
an
ge
in
Sp
rea
d
2008 2009 2010 2011 2012 2013 2014 2015 2016
16 / 27
Figure: Percentage of \Perverse" outlook changes
Target Rate Surprises
2008 2010 2012 2014 2016
020
4060
8010
0
Per
cent
of f
orec
aste
rs w
ith D
elph
ic r
espo
nses
Communications Surprises
2008 2010 2012 2014 2016
020
4060
8010
0
Per
cent
of f
orec
aste
rs w
ith D
elph
ic r
espo
nses
17 / 27
Figure: Impulse Responses
Target Rate Shock Orthogonalized Target Rate Shock
0 10 20 30 40
IP
−6
−3
0
0 10 20 30 40
CPI
−2
0
2
0 10 20 30 40
Italian−German 2−Year Spread
−2
0
2
4
0 10 20 30 40
Dollar/Euro
−0.2
−0.1
0
0.1
0 10 20 30 40
GM Credit Spread
−2
0
2
4
0 10 20 30 40
IP
−20
0
20
0 10 20 30 40
CPI
−4
0
4
0 10 20 30 40
Italian−German 2−Year Spread
0
4
8
0 10 20 30 40
Dollar/Euro
−0.3
−0.15
0
0.15
0 10 20 30 40
GM Credit Spread
0
3
6
Communications Shock Orthogonalized Communications Shock
0 10 20 30 40
IP
0
3
6
0 10 20 30 40
CPI
−0.45
0
0.45
0.9
0 10 20 30 40
Italian−German 2−Year Spread
−2
0
2
0 10 20 30 40
Dollar/Euro
−0.2
−0.1
0
0 10 20 30 40
GM Credit Spread
0
0.45
0.9
0 10 20 30 40
IP
0
5
10
0 10 20 30 40
CPI
−2
0
2
4
0 10 20 30 40
Italian−German 2−Year Spread
0
3
6
0 10 20 30 40
Dollar/Euro
−0.3
−0.15
0
0 10 20 30 40
GM Credit Spread
−2
0
2
4
17 / 27
Figure: Impulse Responses where �1 = ��2
Target Rate Shock Orthogonalized Target Rate Shock
0 10 20 30 40
IP
−6
−3
0
0 10 20 30 40
CPI
−2
0
2
0 10 20 30 40
Italian−German 2−Year Spread
−2
0
2
4
0 10 20 30 40
Dollar/Euro
−0.2
−0.1
0
0.1
0 10 20 30 40
GM Credit Spread
−2
0
2
4
0 10 20 30 40
IP
−20
0
20
0 10 20 30 40
CPI
−4
0
4
0 10 20 30 40
Italian−German 2−Year Spread
0
4
8
0 10 20 30 40
Dollar/Euro
−0.2
0
0.2
0 10 20 30 40
GM Credit Spread
0
3
6
Communications Shock Orthogonalized Communications Shock
0 10 20 30 40
IP
0
3
6
0 10 20 30 40
CPI
−0.45
0
0.45
0.9
0 10 20 30 40
Italian−German 2−Year Spread
−2
0
2
0 10 20 30 40
Dollar/Euro
−0.2
−0.1
0
0 10 20 30 40
GM Credit Spread
0
0.45
0.9
0 10 20 30 40
IP
0
4
8
0 10 20 30 40
CPI
−2
0
2
4
0 10 20 30 40
Italian−German 2−Year Spread
0
3
6
0 10 20 30 40
Dollar/Euro
−0.3
−0.15
0
0 10 20 30 40
GM Credit Spread
−2
0
2
4
18 / 27
Figure: Jarocinski Karadi (2018)Figure 2: Impulse responses to one standard deviation shocks, baseline VAR. Median (line),percentiles 16-84 (darker band), percentiles 5-95 (lighter band).
A. Sign restrictions B. Standard HFIMonetary policy CB information
(negative co-movement) (positive co-movement)Monetary policy
(Choleski, 3m fff first)
0 10 20 300
0.05
sur
pris
e in
3m F
F fu
ture
s
0 10 20 300
0.05
0 10 20 30-0.5
0
0.5
surp
rise
inS
&P
500
0 10 20 30-0.5
0
0.5
0 10 20 30-0.1
0
0.1
0.2
1y g
ovt.
bond
yi
eld
(%)
0 10 20 30-0.1
0
0.1
0.2
0 10 20 30-2
-1
0
1
S&
P50
0(1
00 x
log)
0 10 20 30-2
-1
0
1
0 10 20 30
-0.3-0.2-0.1
00.1
Rea
l GD
P(1
00 x
log)
0 10 20 30
-0.3-0.2-0.1
00.1
0 10 20 30
-0.1
0
0.1
GD
P d
efla
tor
(100
x lo
g)
0 10 20 30
-0.1
0
0.1
0 10 20 30-0.05
0
0.05
EB
P(%
)
0 10 20 30-0.05
0
0.05
0 10 20 300
0.05
sur
pris
e in
3m F
F fu
ture
s
0 10 20 30-0.5
0
0.5
surp
rise
inS
&P
500
0 10 20 30-0.1
0
0.1
0.2
1y g
ovt.
bond
yi
eld
(%)
0 10 20 30-2
-1
0
1
S&
P50
0(1
00 x
log)
0 10 20 30
-0.3-0.2-0.1
00.1
Rea
l GD
P(1
00 x
log)
0 10 20 30
-0.1
0
0.1
GD
P d
efla
tor
(100
x lo
g)
0 10 20 30-0.05
0
0.05
EB
P(%
)
months months months
ECB Working Paper Series No 2133 / February 2018 19
19 / 27
\Information e�ect" and monetary policy uncertainty
Examine the relationship between Delphic FG shocks and measures
of monetary policy uncertainty
I market-based and news-based measures of uncertainty about
ECB monetary policy
I implied volatility of 3-month Euribor from estimating
probability distribution functions using options prices.
Variance of the estimated distribution for 3-month Euribor
180 days ahead.
I news-based measures akin to Baker-Bloom-Davis and
Husted-Rogers-Sun
20 / 27
Table: Monetary Policy Uncertainty Index Construction
Country (i) (ii) (iii) Newspapers
uncertainty monetary policy \Bank of Canada" Gazette
uncertain interest rate \BOC" Globe and Mail
Canada policy rate Ottawa Citizen
overnight rate Toronto Star
overnight lending rate Vancouver Sun
uncertainty monetary policy \European Central Bank" Financial Times
Euro uncertain interest rate \ECB" New York Times
Area policy rate \Governing Council" Wall Street Journal
re�nancing tender
eonia
uncertainty monetary policy \Bank of Japan" Financial Times
Japan uncertain interest rate \BOJ" New York Times
policy rate Wall Street Journal
call rate
uncertainty monetary policy \Bank of England" Daily Telegraph
United uncertain interest rate \BOE" Financial Times
Kingdom policy rate \Monetary Policy Committee" Guardian
bank rate \MPC" Independent
overnight lending rate Times of London
Notes: Words in quotes are searched as exact terms. All other words searched over allow for plural forms.
20 / 27
Figure: Monetary Policy Uncertainty for the Eurozone Correlation = .577
Euro Crisis LiftoffBrexit
USElection
0
50
100
150
200
250
300
350In
dex
(Avg
= 1
00)
2004 2009 2014Year
21 / 27
MPS Decomposition Estimates
�MPSm;t = �0+�1(privateforecast�;t���ecbforecast�;t)+�t
I Target Rate window: �1 = 0.077, F-stat = 9.548 (p=0.004)
I Communications window: �1 = -0.028, F-stat = 0.542
(p= 0.467)
21 / 27
Figure: 3-Month Euribor Volatility vs Target Rate Surprises
Orthogonalized Delphic
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●●
●
●
●
●
● ●
●
●
●●
●
−0.06 −0.04 −0.02 0.00 0.02 0.04
0.0
0.1
0.2
0.3
0.4
0.5
Orthogonalized target rate MP surprises
Eur
ibor
3−
mon
th v
olat
ility
0.3
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●●
●
●
●
●
● ●
●
●
●●
●
−0.02 0.00 0.02 0.04
0.0
0.1
0.2
0.3
0.4
0.5
Delphic target rate MP surprises
Eur
ibor
3−
mon
th v
olat
ility
0.59
22 / 27
Figure: 3-Month Euribor Volatility vs Communications Surprises
Orthogonalized Delphic
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●●
●
●
●
●
● ●
●
●
●● ●
●
−0.15 −0.10 −0.05 0.00 0.05
0.0
0.1
0.2
0.3
0.4
0.5
Orthogonalized communications MP surprises
Eur
ibor
3−
mon
th v
olat
ility
0.25
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●●
●
●
●
●
●●
●
●
●●●
●
−0.015 −0.010 −0.005 0.000 0.005 0.010
0.0
0.1
0.2
0.3
0.4
0.5
Delphic communications MP surprises
Eur
ibor
3−
mon
th v
olat
ility
−0.59
23 / 27
Figure: News-Based MPU vs Target Rate Surprises
Orthogonalized Delphic
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
−0.06 −0.04 −0.02 0.00 0.02 0.04
5010
015
020
0
Orthogonalized target rate MP surprises
New
s−B
ased
MP
U
0.01
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
−0.02 0.00 0.02 0.04
5010
015
020
0
Delphic target rate MP surprises
New
s−B
ased
MP
U
−0.31
24 / 27
Figure: News-Based MPU vs Communications Surprises
Orthogonalized Delphic
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
−0.15 −0.10 −0.05 0.00 0.05
5010
015
020
0
Orthogonalized communications MP surprises
New
s−B
ased
MP
U
−0.24
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
−0.015 −0.010 −0.005 0.000 0.005 0.010
5010
015
020
0
Delphic communications MP surprises
New
s−B
ased
MP
U
0.31
25 / 27
Conclusion
I Analyze two types of ECB monetary policy shocks
I ECB objective on periphery-core spreads, preserving the euro
I Target rate shocks look conventional
I Communication shocks suggestive of information e�ects
I \Orthogonalized" shocks produce more conventional responses
26 / 27
![Abstract. arXiv:1702.03970v1 [cs.CV] 13 Feb 2017 · There are over 1 million di erent physical signs. The di erent views are of di erent quality, possibly taken from an acute angle,](https://static.documents.pub/doc/80x56/5eaddcb509a3dc2c26760754/abstract-arxiv170203970v1-cscv-13-feb-2017-there-are-over-1-million-di-erent.jpg)
