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This paper documents that ECB announcements on monetary policy increase stock market volatility in the euro area (EA) using several volatility measures from January 1999 to December 2019. Employing event study methods, a more pronounced impact exists following the global financial crisis starting in 2007. All assets react similarly so that no national peculiarities arise. The effects also spill over to 12 non-EA markets analyzed. Stock markets are more sensitive to negative monetary policy news than to positive ones. Further weighting the announcements by financial market reactions, stock markets behave in a more heterogeneous way.
This paper examines the role of uncertainty in the context of the business cycle in the Eurozone. To gain a more granular perspective on uncertainty, the paper decomposes uncertainty along two dimensions: First, we construct the four different moments of uncertainty, including the point estimate, the standard deviation, the skewness and the kurtosis. The second dimension of uncertainty spans along three distinct groups of economic agents, including consumers, corporates and financial markets. Based on this taxonomy, we construct uncertainty indices and assess the impact on real GDP via impulse response functions and further investigate their informational value in rolling out-of-sample GDP forecasts. The analysis lends evidence to the hypothesis that higher uncertainty expressed through the point estimate, a larger standard deviation among confidence estimates, positive skewness and a higher kurtosis are all negatively correlated with the business cycle. The impulse response functions reveal that in particular the first and the second moment of uncertainty cause a permanent effect on GDP with an initial decline and a subsequent overshoot. We find uncertainty in the corporate sector to be the main driver behind this observation, followed by financial markets’ uncertainty whose initial effect on GDP is comparable but receding much faster. While the first two moments of uncertainty improve GDP forecasts significantly, both the skewness and the kurtosis do not augment the forecast quality any further.
This paper examines the recession probabilities for the Eurozone along four different dimensions: First, we identify the best performing indicators for a recession within the next 12 months based on 43 underlying single variables and their different transformations in a benchmark model. We find that a modified version of the yield curve incorporating the shadow interest rate removes the downward rigidity of the front-leg and restores part of the informational content of the term spread at the zero lower bound. However, the best performing single indicator of the benchmark model is Real M1 followed by the Purchasing Managers Index (PMI), the investment grade corporate bond spread and the Terms of Trade. Second, the paper establishes three submodels to increase the lead-time and the stability of recession models: (i) Monetary transmission channels via principal component analysis; (ii) Bivariate regressions to identify paramount combinations; (iii) Unstable surges vis-à-vis the Hodrick-Prescott trend to detect animal spirits and hawkish mistakes. Third, the analysis is extended over various forecasting horizons (6m, 18m and 24m). Fourth, the results are analyzed from the perspective of risk-affine and risk-averse investors.
This paper employs event study methods to evaluate the effects of ECB’s nonstandard monetary policy program announcements on 10-year government bond yields of euro area member states. It covers data from 11 euro area countries from January 1, 2007 to August 31, 2017 and distinguishes between the more solvent countries (Austria, Belgium, Finland, France, Germany, the Netherlands) and the less solvent ones (Greece, Ireland, Italy, Portugal, Spain). The paper makes three contributions to the literature. First, it is the first paper to reveal that measurable effects of announcements arise with a one-day delay meaning that government bond markets take some time to react to ECB announcements. Second, it quantifies the country-specific extent of yield reduction which seems inversely related to the solvency rating of the corresponding countries. The reduction of the spread between both groups in response to an event is due to a stronger decrease in the less solvent group. Third, this result is confirmed by letting the announcement variable interact with the spread level, which is an innovation in this strand of literature. By employing different data as control variables, it turns out that the results are robust for a given event set.
We use oil price forecasts from the Consensus Economic Forecast poll to analyze how forecaster build their expectations. Our findings point into the direction that the extrapolative as well as the regressive expectation formation hypothesis play a role. Standard measures of forecast accuracy reveal forecasters' underperformance relative to the random-walk benchmark. However, it seems that this result might be biased due to peso problems.
We use the ECB's Survey of Professional Forecaster to show that euro area expectations are consistent with standard macroeconomic building blocks such as the Phillips curve, Okun's law, and the Taylor rule. Moreover, the paper finds that the financial and economic crisis of 2007-2009 did not change the expectation formation process as professional forecasters still adopt macroeconomic building blocks for their forecast. The scepticism that has recently been raised concerning macroeconomic building blocks has apparently not yet affected professional forecasts. On the contrary, we conclude that professional forecasters still have faith in macroeconomic building blocks.
This paper analyzes the expectation formation process in Denmark, Norway, Sweden and Switzerland. We use the Consensus Economic Forecast poll and show that the forecasts are consistent with Taylor-type rules for three countries but not for Norway. This can be attributed to Norway's long period of an exchange rate targetor. Additionally, we provide evidence that the expected long-term inflation rate is consistent with both the actual average in ation rate and the inflation target for all countries. This implies that the professional forecasters understand the different monetary policy strategies among the four countries indicating that all central banks can be regarded as highly credible.
"Ex-ante" Taylor rules
(2008)
This paper addresses the question whether financial market participants apply the framework of Taylor-type rules in their forecasts for the G7 countries. Therefore, we use the Consensus Economic Forecast poll providing us a unique data set of inflation, interest and growth rate forecasts for the time period 1989 - 2007. We provide evidence that Taylor-type rules frameworks are present in forecasts of financial markets. Thus, the paper, uses ex-ante data for the estimation of Taylor rules. This is novel, since so far only ex-post (revised) or real-time data have been applied.
Inflation targeting matters!
(2008)
Proponents of inflation targeting argue that such a strategy directly influences expectation formation processes in financial markets. This paper provides a novel test for the evidence that financial market expectations are formed differently under inflation targeting regimes. Using forecasts for the short-term interest rate, the inflation rate, and output growth for ten emerging markets in Latin-America, central and eastern Europe out of which six economies are inflation targeting economies we estimate expected Taylor-type rules. We find evidence for differences in the expectation formation process in the sense that the well-known Taylor principle fairly holds for countries which adopt an inflation targeting system, while for the other countries it does not.
On the international consistency of short-term, medium-term, and long-term oil price forecasts
(2011)
We derive internal consistency restrictions on short-term, mediumterm, and long-term oil price forecasts. We then analyze whether oil price forecasts extracted from the Survey of Professional Forecasters conducted by the European Central Bank satisfy these internal consistency restrictions. We find that neither short-term forecasts are consistent with medium-term forecasts nor that medium-term forecasts are consistent with long-term forecasts. Using a more complex expectation formation structure featuring a distributed lag structure, however, we find stronger evidence of internal consistency of mediumterm forecasts with long-term forecasts.
Do FOMC members herd?
(2011)
Twice a year FOMC members submit forecasts for growth, unemployment and inflation to be published in the Humphrey-Hawkins Report to Congress. In this paper we use individual FOMC forecasts to assess whether these forecasts exhibit herding behavior, a pattern often found in private sector forecasts. While growth and unemployment forecast do not show herding behavior, the inflation forecasts show strong evidence of anti-herding, i.e. FOMC members intentionally scatter their forecasts around the consensus. Interestingly, anti-herding is more important for nonvoting members than for voters.
In this paper, we contrast more than 6,000 private sector forecasts to projections of the German council of economic experts (Sachverständigenrat). Although the forecasts are submitted simultaneously, we find that the council's real economy forecasts, i.e. their growth, unemployment and fiscal forecasts have a higher forecast accuracy compared to the private sector forecasts. We also document that private sector forecasters deliberately place their real economy forecasts away from the council's projection. This strategic forecasting behavior explains why the private sector performs worse than the council. This result is robust over time but splitting the private sector in different groups reveals that the forecasts of banks compared to research institutes deviate more from the council's forecast.
Central bank projections have gained considerable attention for monetary policy modeling. However, less is known about the nature of central bank projections. This letter explores the unbiasedness and rationality of more than 2; 000 growth and in ation projections published by 15 major central banks. The results indicate that central bank projections are in most cases rational and unbiased. Interestingly,
in ation projections are more biased than growth projections.
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