The cost of banking regulation, Issue 12501
National Bureau of Economic Research, 2006 - Business & Economics - 49 pages
"The current literature has provided a number of important insights about the effects of macroeconomic data releases on monetary policy expectations and asset prices. However, one puzzling aspect of that literature is that the estimated responses are quite small. Indeed, these studies typically find that the major economic releases, taken together, account for only a small amount of the variation in asset prices even those closely tied to near-term policy expectations. In this paper we argue that this apparent detachment arises in part from the difficulties associated with measuring macroeconomic news. We propose two new econometric approaches that allow us to account for the noise in measured data surprises. Using these estimators, we find that asset prices and monetary policy expectations are much more responsive to incoming news than previously believed. Our results also clarify the set of facts that should be captured by any model attempting to understand the interactions between economic data, monetary policy, and asset prices"--National Bureau of Economic Research web site.
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1C estimator 1ndeed 30-minute window asset prices basis points Brian Sack Capacity Utilization captured Chicago PM1 coefficients Consumer Confidence contract a proxy core CP1 covariance data on inflation econometric Effects of Macroeconomic employment report equation equity prices error-in-variables eurodollar futures contract Eventstudy Estimates eventstudy exercise eventstudy literature eventstudy regression expectations and asset federal funds rate financial variables GDP Advance given release Home Sales homoskedastic identification identifying assumptions incoming data intraday data Macroeconomic Announcements macroeconomic data releases Macroeconomic Data Surprises macroeconomic surprise market expectations market reaction market response measured data surprises measurement error mismeasurement monetary policy expectations Monthly NBER noise noisy non-announcement days nonfarm payrolls papers in hard parameters PC exercise prices and monetary problem proxy for policy R-squared Retail Sales ex Roberto Rigobon Sales ex Autos surprise component surprise measure survey survey-based surprises ten-year true macroeconomic two-year Treasury yield two-year yield variance variance-covariance matrix variation in asset zero