Monetary policy and the corporate bond market: How important is the Fed information effect?

Michael Smolyansky and Gustavo Suarez
Additional contact information
Michael Smolyansky: https://www.federalreserve.gov/econres/michael-smolyansky.htm

No 2021-010, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the "Fed information effect". Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.

Keywords: Monetary policy; Corporate bonds; Reaching for yield; Federal Reserve information (search for similar items in EconPapers)
JEL-codes: E40 E52 G12 G14 (search for similar items in EconPapers)
Pages: 37 p.
Date: 2021-02-16
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2021010pap.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2021-10

DOI: 10.17016/FEDS.2021.010

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().