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The Impact of ECB Communication on Financial Market Expectations

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Author Info
Michael Lamla () (Department of Management, Technology and Economics, ETH Zurich)
Sarah M. Rupprecht () (KOF Swiss Economic Institute, ETH Zurich)

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Abstract

This paper analyzes European financial markets’ comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB’s introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB’s interpretation and forecasts of price developments represent important news to financial market agents.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 06-135.

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Length: 29 pages
Date of creation: Apr 2006
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Handle: RePEc:kof:wpskof:06-135

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Related research
Keywords: Central Bank Communication; Expectations; Term Structure of Interest Rates; Yield Curve; ECB;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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