Monetary policy expectation errors
Andreas Schrimpf and
Sigurd A. M. Steffensen
No 996, BIS Working Papers from Bank for International Settlements
How are financial markets pricing the monetary policy outlook? We use survey expectations to decompose excess returns on money market instruments into term premia and expectation errors. We find excess returns to be driven primarily by expectation errors, whereas term premia are negligible. Our findings point to challenges faced by investors in learning about the Federal Reserve's response to large, but infrequent, negative shocks in real-time. Rather than reflecting risk compensation, excess returns stem from investors underestimating by how much the central bank has eased in response to such rare shocks. We document similar results in an international sample.
Keywords: expectation formation; monetary policy; federal funds futures; overnight index swaps; uncertainty. (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 G15 (search for similar items in EconPapers)
Pages: 83 pages
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Journal Article: Monetary policy expectation errors (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:996
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