What Color is Alan Greenspan's Tie? How Central Bank Policy Announcements Have Changed Financial Markets

Aleksandar Murdzhev and Marc Tomljanovich ()
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Aleksandar Murdzhev: Colgate University
Marc Tomljanovich: Drew University

Eastern Economic Journal, 2006, vol. 32, issue 4, pages 571-593

Abstract: The 1990s witnessed dramatic improvements in transparency across a wide spectrum of central banks. Though these changes appeared motivated by political factors, did corresponding financial markets gain economic efficiency by the revealing of additional policy information? We employ time-series techniques to study six developed economies from 1990 to 2003, focusing on the daily impacts of policy announcements on both debt and equity markets. We find that for all six countries, market participants have been better able to anticipate central bank policy decisions since the move to greater transparency, helping to improve market efficiency as well as to reduce the outside lags associated with monetary policy. These results hold strongly for both bond and stock markets, and are robust to alternate modeling specifications.

Date: 2006
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