DP12970 Central Bank Communication and the Yield Curve

Author(s): Matteo Leombroni, Andrea Vedolin, Gyuri Venter, Paul Whelan
Publication Date: June 2018
Keyword(s): central bank communication, Eurozone, interest rates, monetary policy, risk premia
JEL(s): E42, E58, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12970

Using the institutional features of ECB monetary policy announcements, we provide direct evidence for the risk premium channel of central bank communication. We show that on days when the ECB announces its monetary policy almost all of the variation of bond yields is driven by communication. Moreover, while the effect of monetary policy is homogeneous across countries before the European debt crisis, we document dramatic differences post crisis and show that communication shocks drive a wedge between peripheral and core yields. We empirically link the periphery-core wedge to break-up and credit risk premia, and study this channel theoretically through the lens of an equilibrium model in which central bank communication reveals information about the state of the economy.