IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Learning the rules of the new game? Comparing the reactions in financial markets to announcements before and after the Bank of England's operational independence

  • Ana Lasaosa

The subject of this paper is how the increase in transparency brought about by the Bank of England's operational independence has changed the way in which markets react immediately after economic announcements. Other things being equal, the increase in transparency of the new framework will make monetary policy more predictable once the latest macroeconomic data are known. On this view, the market will be less sensitive to interest rate decisions and more sensitive to macroeconomic data releases. Previous research on the subject showed a more muted reaction to macroeconomic releases in the United Kingdom after 1997, and suggested that markets were still learning the rules of the new monetary framework. With two more years of data and a complementary analysis of trading activity, this study finds that macroeconomic announcements continue to move the markets less in the post-independence period, and interest rate changes the same or more. A separate analysis of the surprise announcements and the surprise component of each announcement reveals a similar pattern. Nor is the possibly greater impact of international announcements - another candidate explanation - borne out by the data. Finally, the paper finds that the reactions to macroeconomic announcements are in fact stronger in the second half than in the first half of the post-independence period. An increase in transparency is not the only change brought about by operational independence. Among other things, the collective nature of the Monetary Policy Committee and a perceived shift towards a more implicit policy rule since operational independence may have made its decisions harder to anticipate, thus decreasing the response to macroeconomic releases and increasing the reaction to monetary policy decisions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2005/WP255.pdf
Download Restriction: no

Paper provided by Bank of England in its series Bank of England working papers with number 255.

as
in new window

Length:
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:boe:boeewp:255
Contact details of provider: Postal:
Bank of England, Threadneedle Street, London, EC2R 8AH

Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
  2. Clare Lombardelli & James Proudman & James Talbot, 2005. "Committees Versus Individuals: An Experimental Analysis of Monetary Policy Decision-Making," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
  3. Geraats, Petra M., 2001. "Why adopt transparency? The publication of central bank forecasts," Working Paper Series 0041, European Central Bank.
  4. Eijffinger, S.C.W. & Geraats, P., 2006. "How transparent are central banks?," Other publications TiSEM b34dfb1f-520f-4787-a08f-5, Tilburg University, School of Economics and Management.
  5. Mervyn A. King, 1999. "Challenges for monetary policy : new and old," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 11-57.
  6. Jon Faust & Lars E. O. Svensson, 1998. "Transparency and credibility: monetary policy with unobservable goals," International Finance Discussion Papers 605, Board of Governors of the Federal Reserve System (U.S.).
  7. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York.
  8. Michael Joyce & Vicky Read, 2002. "Asset price reactions to RPI announcements," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 253-270.
  9. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1996. "Economic News and the Yield Curve: Evidence From the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-13, New York University, Leonard N. Stern School of Business-.
  10. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  11. Andrew Clare & Roger Courtenay, 2001. "Assessing the impact of macroeconomic news announcements on securities prices under different monetary policy regimes," Bank of England working papers 125, Bank of England.
  12. Jon Faust & John H. Rogers & Shing-Yi Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers 784, Board of Governors of the Federal Reserve System (U.S.).
  13. Jensen, Henrik, 2001. "Optimal Degrees of Transparency in Monetary Policymaking," CEPR Discussion Papers 2689, C.E.P.R. Discussion Papers.
  14. Chadha, Jagjit S. & Nolan, Charles, 2001. "Inflation Targeting, Transparency and Interest Rate Volatility: Ditching Monetary Mystique in the U.K," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 349-366, July.
  15. Sibert, Anne, 1999. "Monetary Policy Committees: Individual and Collective Reputations," CEPR Discussion Papers 2328, C.E.P.R. Discussion Papers.
  16. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange?," Center for Financial Institutions Working Papers 02-23, Wharton School Center for Financial Institutions, University of Pennsylvania.
  17. Winkler, Bernhard, 2000. "Which kind of transparency? On the need for clarity in monetary policy-making," Working Paper Series 0026, European Central Bank.
  18. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September.
  19. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
  20. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
  21. Hans Gersbach & Volker Hahn, 2008. "Should the individual voting records of central bankers be published?," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 30(4), pages 655-683, May.
  22. Petra Gerlach-Kristen, 2004. "Is the MPC's Voting Record Informative about Future UK Monetary Policy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 299-313, 06.
  23. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
  24. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  25. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2003. "Does monetary policy transparency reduce disinflation costs?," Manchester School, University of Manchester, vol. 71(5), pages 521-540, 09.
  26. Torben G. Andersen, 2001. "Variance-ratio Statistics and High-frequency Data: Testing for Changes in Intraday Volatility Patterns," Journal of Finance, American Finance Association, vol. 56(1), pages 305-327, 02.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:255. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Digital Media Team)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.