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News Shock Spillovers: How the Euro Area Responds to Expected Fed Policy

Author

Listed:
  • Paul Rudel

    () (Justus-Liebig-University Giessen)

  • Peter Tillmann

    () (Justus-Liebig-University Giessen)

Abstract

Monetary policy increasingly relies on steering market expectations about future policy. This paper identifies a monetary policy news shock based on a VAR model. A monetary news shock is equivalent to new information about the Fed's future monetary policy becoming available today. One example of a monetary news shock is a Forward Guidance announcement, where the Fed unveils its prospectively (binding) monetary policy, today. In this paper, we study the spillover effects of news shocks. We estimate the response of the euro area to an expected future policy tightening of the Fed. The U.S. news shock improves sentiment and business cycle expectations in the euro area, which is consistent with the notion of the Fed revealing favorable news by a tightening announcement. We also distinguish the news shock from a conventional U.S. policy surprise and find that they lead to diverging responses in the euro area.

Suggested Citation

  • Paul Rudel & Peter Tillmann, 2018. "News Shock Spillovers: How the Euro Area Responds to Expected Fed Policy," MAGKS Papers on Economics 201832, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201832
    as

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    File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2018/32-2018_rudel.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    News shock; spillovers; forward guidance; monetary policy; interest rates; expectations;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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