Central Bank Communication and the Yield Curve

Matteo Leombroni, Andrea Vedolin, Gyuri Venter, Paul Whelan

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on swap rates and sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB's private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication can induce demand shocks for bonds due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.
Original languageEnglish
Publication date2017
Number of pages56
Publication statusPublished - 2017
EventThe 15th International Paris December Finance Meeting - Novotel Paris les Halles hotel, Paris, France
Duration: 21 Dec 201721 Dec 2017
Conference number: 15
https://www.eurofidai.org/fr/paris-december-2017

Conference

ConferenceThe 15th International Paris December Finance Meeting
Number15
LocationNovotel Paris les Halles hotel
CountryFrance
CityParis
Period21/12/201721/12/2017
Internet address

Keywords

  • Interest rates
  • Home bias
  • Monetary policy
  • Sovereign bonds
  • Reaching for yield

Cite this

Leombroni, M., Vedolin, A., Venter, G., & Whelan, P. (2017). Central Bank Communication and the Yield Curve. Paper presented at The 15th International Paris December Finance Meeting, Paris, France.
Leombroni, Matteo ; Vedolin, Andrea ; Venter, Gyuri ; Whelan, Paul. / Central Bank Communication and the Yield Curve. Paper presented at The 15th International Paris December Finance Meeting, Paris, France.56 p.
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Leombroni, M, Vedolin, A, Venter, G & Whelan, P 2017, 'Central Bank Communication and the Yield Curve' Paper presented at, Paris, France, 21/12/2017 - 21/12/2017, .

Central Bank Communication and the Yield Curve. / Leombroni, Matteo; Vedolin, Andrea; Venter, Gyuri; Whelan, Paul.

2017. Paper presented at The 15th International Paris December Finance Meeting, Paris, France.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Central Bank Communication and the Yield Curve

AU - Leombroni, Matteo

AU - Vedolin, Andrea

AU - Venter, Gyuri

AU - Whelan, Paul

PY - 2017

Y1 - 2017

N2 - We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on swap rates and sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB's private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication can induce demand shocks for bonds due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.

AB - We decompose ECB monetary policy surprises into target and communication shocks and document a number of novel findings. First, consistent with the idea that concurrent implementation of monetary policy is largely anticipated, we find that target shocks only have a limited effect on yields. However, we show that communication shocks have a large and economically significant impact on swap rates and sovereign yields, displaying a hump-shaped pattern across maturity. Second, we document that around the European debt crisis communication had the effect of driving a wedge between yields on core versus peripheral countries. We study two explanations for this finding, revelation of the ECB's private information and credit risk, and argue that neither channel can explain the effect on yield spreads. Motivated by this, we consider an alternative explanation in which central bank communication can induce demand shocks for bonds due to the presence of reaching-for-yield investors. We show that a resulting risk premium channel helps to rationalize our findings.

KW - Interest rates

KW - Home bias

KW - Monetary policy

KW - Sovereign bonds

KW - Reaching for yield

KW - Interest rates

KW - Home bias

KW - Monetary policy

KW - Sovereign bonds

KW - Reaching for yield

M3 - Paper

ER -

Leombroni M, Vedolin A, Venter G, Whelan P. Central Bank Communication and the Yield Curve. 2017. Paper presented at The 15th International Paris December Finance Meeting, Paris, France.