Euro Area Monetary Policy Shocks: Impact on Financial Asset Prices During the Crisis?

46 Pages Posted: 17 Oct 2014

See all articles by Caroline Jardet

Caroline Jardet

Banque de France

Allen Monks

Central Bank of Ireland

Date Written: October 2014

Abstract

We use high-frequency intraday interest rate data to measure euro area monetary policy shocks on the days of ECB interest rate announcements between 2002 and 2013. In line with Gürkaynak et al. (2005), we look at monetary policy shocks along two time dimensions: one related to the current level of short-term interest rates and a second related to expectations for the future path of these rates. We undertake regression analysis in order to determine the impact of monetary policy shocks on euro-denominated financial asset prices and confirm that shocks related to the future path of monetary policy are an important driver, particularly for longer-term bond yields. We find that this relationship has changed for certain asset classes since the onset of the crisis, notably the sovereign bonds of stressed euro area countries. These findings highlight the changed nature of the monetary policy transmission mechanism for some euro area countries during the sovereign debt crisis.

Keywords: Monetary policy, ECB, Transmission mechanism, financial crisis

JEL Classification: E43, E52, E58, E61, E65

Suggested Citation

Jardet, Caroline and Monks, Allen, Euro Area Monetary Policy Shocks: Impact on Financial Asset Prices During the Crisis? (October 2014). Banque de France Working Paper No. 512, Available at SSRN: https://ssrn.com/abstract=2510830 or http://dx.doi.org/10.2139/ssrn.2510830

Caroline Jardet (Contact Author)

Banque de France ( email )

31 rue croix des petits champs
75049 Paris Cedex 01
France

Allen Monks

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

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