Monetary Policy, the Bond Market, and Changes in FOMC Communication Policy

Troy Davig () and Jeffrey Gerlach ()
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Jeffrey Gerlach: Department of Economics, College of William and Mary

No 31, Working Papers from Department of Economics, College of William and Mary

Abstract: Using high-frequency data in a Markov-switching framework, we identify states that imply different responses of the yield curve to unexpected changes in the federal funds target. Empirical estimates reveal a low-volatility state where long-term bonds respond significantly, and in a predictable manner, to unexpected changes in the federal funds target. An alternative state exists with higher volatility, where unexpected changes in the federal funds target raise the short-end of the yield curve, but have no significant effect on the long-end. The low-volatility state for long-term bonds occurs from September 1995 to May 1999 and again from March 2000 to January 2002. The timing of the switches between the two states for long-term bonds coincides with changes in FOMC communication policy - though not all changes in communications policy induce a switch.

Keywords: Monetary Policy; Bond Market; Markov-Switching; Central Bank Communications (search for similar items in EconPapers)
JEL-codes: E43 E58 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fin, nep-fmk, nep-mac, nep-mon and nep-mst
Date: 2006-07-11

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