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Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements

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  • Refet Gurkaynak

    (Federal Reserve Board)

  • Brian Sack

    (Federal Reserve Board)

  • Eric Swanson

    (Federal Reserve Board)

Abstract

We investigate the effects of U.S. monetary policy on asset prices using a high frequency event-study analysis. We test whether these effects are adequately captured by a single factor—changes in the federal funds rate target—and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a “current federal funds rate target” factor and a “future path of policy” factor, with the latter closely associated with FOMC statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday dataset going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0504013.

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Date of creation: 07 Apr 2005
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Handle: RePEc:wpa:wuwpma:0504013

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  1. Faust Jon & Swanson Eric T & Wright Jonathan H, 2004. "Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-31, October.
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  21. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
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