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Talking less and moving the market more: is this the recipe for monetary policy effectiveness?: evidence from the ECB and the Fed

  • Carlo Rosa
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    This paper examines and compares the communication strategies of the Federal Reserve and the European Central Bank, and their effectiveness. First we do a comparative study exercise. We find that on monetary policy committee meeting days both the ECB and the Fed can move market rates using either monetary policy or news shocks. However, the response of the long-end of the American term structure to the surprise component of Fed's statements is significantly larger than the reaction of European long-term yields to ECB's announcements. This result is intimately related to the higher transparency of U.S. Fed statements compared to ECB announcements rather than to the different institutional mandate of the two central banks. Second, we investigate the cross-effects i.e. the Fed's ability to move European interest rates and the corresponding ECB's capacity to move American rates. We find that the Fed has been more able to move the European interst rates of all maturities than the ECB to move American rates. This finding is tied to the predominance of dollar fixed income assets rather than to an attempt of the ECB to mimic the Fed.

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    File URL: http://eprints.lse.ac.uk/19629/
    File Function: Open access version.
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19629.

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    Length: 43 pages
    Date of creation: Feb 2008
    Date of revision:
    Handle: RePEc:ehl:lserod:19629
    Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
    Phone: +44 (020) 7405 7686
    Web page: http://www.lse.ac.uk/

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