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Central bank communication, transparency and interest rate volatility: Evidence from the USA

Biefang-Frisancho Mariscal, Iris; Howells, Peter

Central bank communication, transparency and interest rate volatility: Evidence from the USA Thumbnail


Authors

Iris Biefang-Frisancho Mariscal

Peter Howells



Contributors

Giuseppe Fontana
Editor

John McCombie
Editor

Malcolm Sawyer
Editor

Abstract

The FOMC has changed its style of communication twice recently: from 2000-2003, the Committee imparted information about its assessment on the economic outlook (‘the balance-of-risk statements’) and since August 2003 the FOMC has informed agents additionally about its outlook’s implications for the future federal funds target rate (‘forward-looking language’). The result should be that agents do not need to deduce FOMC’s likely policy move on every twitch of central bank communication and macroeconomic news. Markets have anticipated FOMC policy decisions on the day of the meeting very well since 1994. Therefore, the focus of this paper is on the behaviour of market rates between FOMC meetings and on testing for greater ‘smoothness’ and lower volatility of market rates during these two different regimes since 2000.
We apply an EGARCH model to forward rates at the short end of the yield curve. The model is used to test for the effects of the three disclosure regimes (pre-2000, 2000-2003 and post-2003) on the dependence of previous and current changes of the market rates in the conditional mean equation. A priori, we would expect to observe higher inertia during the periods when market participants are better informed.
Furthermore, generally, news increases interest rate volatility, since markets adjust interest rates in response to relevant news. However, other FOMC communication (other than the press statements after the FOMC meeting), may have a lower news value in the new disclosure regimes than it had in the pre-2000 period. Therefore, ‘other’ central bank communication may affect the volatility of interest rates differently in the three different regimes. This effect is tested for in the conditional variance of the regression model.
We find that there is evidence of differences in smoothness between the period until 2000 and the period of the balance-of-risk statement. Furthermore, we find that the effect of other than Fed press statements after FOMC meetings varies in the three periods. This is particularly so for Fed communications concerning the economic outlook and speeches by the chairman of the Board.

Citation

Biefang-Frisancho Mariscal, I., & Howells, P. (2010). Central bank communication, transparency and interest rate volatility: Evidence from the USA. In G. Fontana, J. McCombie, & M. Sawyer (Eds.), Macroeconomics, Finance and Money (91-108). London: Palgrave Macmillan

Publication Date Jan 1, 2010
Publicly Available Date Jun 8, 2019
Peer Reviewed Peer Reviewed
Pages 91-108
Book Title Macroeconomics, Finance and Money
ISBN 9780230229068
Keywords federal reserve, transparency, EGARCH
Public URL https://uwe-repository.worktribe.com/output/983331
Publisher URL http://www.palgrave.com/products/title.aspx?PID=359234
Related Public URLs http://carecon.org.uk/DPs/0704.pdf

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