Chiara Scotti

Evaluating Asset‐Market Effects of Unconventional Monetary Policy: A Multi‐Country Review

This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia. — John H. Rogers, Chiara Scotti and Jonathan H. Wright

Surprise and Uncertainty Indexes: Real-Time Aggregation of Real-Activity Macro Surprises

I construct two daily, real-time, real activity indexes for the United States, Euro area, the United Kingdom, Canada, and Japan: (i) a surprise index that summarizes recent economic data surprises and measures optimism/pessimism about the state of the economy, and (ii) an uncertainty index that measures uncertainty related to the state of the economy. The surprise index preserves the properties of the underlying series in affecting asset prices, with the advantage of being a parsimonious summary measure of real-activity surprises. For the United States, the real-activity uncertainty index is compared to other proxies commonly used to measure uncertainty to show that when uncertainty is strictly related to real activity, it has a potentially milder impact on economic activity than when it also relates to the financial sector.

Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison

This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.

Exchange Rates Dependence: What Drives It?

Exchange rate movements are difficult to predict but there appear to be discernible patterns in how currencies jointly appreciate or depreciate against the dollar. In this paper, we study the dependence structure of a number of exchange rate pairs against the dollar. We employ a conditional copula approach to recover the joint distributions for pairs of exchange rates and study both the correlation and the upper and lower tail dependence of these distributions. We analyze changes in dependence measures over time, and we investigate whether these measures are affected by the business cycle or interest rate differentials. Our results show that dependencies are indeed time-varying. We find that foreign and U.S. recessions affect the joint dependence structure and that currencies with higher interest rate differentials tend to move less closely together, not only on average (correlation), but also when extreme events occur (tails).

A Bivariate Model of Fed and ECB Main Policy Rates

This paper studies when and by how much the Fed and the ECB change their target interest rates. I develop a new nonlinear bivariate framework, which allows for elaborate dynamics and potential interdependence between the two countries, as opposed to linear feedback rules, such as a Taylor rule, and I use a novel real-time data set. A Bayesian estimation approach is particularly well suited to the small data sample. Empirical results support synchronization between the central banks and non-zero correlation between magnitude shocks, but they do not support follower behavior. Institutional factors and inflation represent relevant variables for timing decisions of both banks. Inflation rates are important factors for magnitude decisions, while output plays a major role in US magnitude decisions.

Is the intrinsic value of a macroeconomic news announcement related to its asset price impact

The literature documents a heterogeneous asset price response to macroeconomic news announcements. We relate this heterogeneity to a novel measure of the intrinsic value of an announcement—the announcement’s ability to nowcast GDP growth, inflation, and the federal funds target rate—and find that differences across the intrinsic values of several U.S. macroeconomic announcements explain a significant fraction of the variation in the impact each of these announcements has on U.S. Treasury yields. We also decompose the intrinsic value into the announcement’s relation to fundamentals, a timeliness premium, and a revision premium, and find that the former two characteristics are the most important ones in explaining the heterogeneous response.

Does Anyone Listen When Politicians Talk? The Effect of Political Commentaries on Policy Rate Decisions and Expectations

This paper investigates the effects of political commentaries on policy rate decisions and policy expectations in the United States and the euro area. The results suggest that political commentaries do influence policy rate expectations in both regions, even after controlling for macroeconomic releases and immediate interest rate expectations. The findings regarding the policy reaction functions reveal that market expectations are mostly rational. There is no evidence that the Federal Reserve responds to political commentaries that suggest rate hikes or easings. Meanwhile, the European Central Bank seems to have steered its policy in line with political commentaries that suggested further easings during the pre-crisis period, consistent with market expectations.