We propose a new approach to categorising the information contained in various forms of central bank communication (such as monetary policy decision statements, press conferences and minutes). Looking at how bond yields and equity returns move together in response to central bank announcements, we infer different types of underlying economic shocks. We classify this information content in terms of surprises related to monetary policy, the economic growth outlook, and shifts in risk premia.
Building on a macro-finance model of asset prices, we obtain predictions of how different economic shocks influence the direction of the co-movement between stocks and yields and its strength along the yield curve. A conventional monetary shock affects the real interest rate, causing equity prices and bond yields to move in opposite directions, this effect being stronger at short maturities. Shocks to both growth expectations and risk premia cause equity prices and bond yields to move in the same direction. To discriminate between these two types of shock, we exploit the fact that their effects differ in the yield maturity dimension. Growth shocks have a greater effect on the short-to-intermediate part of the yield curve, whereas risk premium shocks more strongly affect its long segment.
We show that news about economic activity and shocks to risk premia (ie non-monetary news) accounts for more than half of the communication events at four major central banks (the Bank of England, Bank of Japan, Fed and ECB). We find significant differences in the news composition across communication tools and over time. Monetary news prevails in the announcements of monetary policy decisions. In press conferences, however, news about economic growth is the dominant piece of information gleaned by market participants. The same is true of other forms of communication aimed at explaining the context of policy decisions. Risk premium shocks typically generate more abrupt movements in asset prices, and their prominence has increased as central banks have resorted to unconventional monetary policies. We find a break in communication content whereby non-monetary news dominated communication during the financial crisis and in its immediate aftermath, with monetary news gaining in importance starting from mid-2013 onward.
We quantify the importance of non-monetary news in central bank communication. Using evidence from four major central banks and a comprehensive classification of events, we decompose news conveyed by central banks into news about monetary policy, economic growth, and separately, shocks to risk premia. Our approach exploits high-frequency comovement of stocks and interest rates combined with monotonicity restrictions across the yield curve. We find significant differences in news composition depending on the communication channel used by central banks. Non-monetary news prevails in about 40% of policy decision announcements by the Fed and the ECB, and this fraction is even higher for communications that provide context to policy decisions such as press conferences. We show that non-monetary news accounts for a significant part of financial markets' reaction during the financial crisis and in the early recovery, while monetary shocks gain importance since 2013.
JEL classification: G12, E43, E52, E58
Keywords: central bank communication, monetary policy shocks, yield curve, stock-bond comovement, central bank information effects, risk premia
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