Understanding the effects of monetary policy is difficult because isolating policy surprises is not easy. The event-study literature provides identified effects of monetary policy by looking at high frequency (daily or higher frequency) asset price changes around the policy announcement, with the identifying assumption that within the day monetary policy does not react to asset prices, and therefore causality goes from monetary policy to asset prices. The event-study literature on monetary policy effects on asset prices in the US goes back to Cook and Hahn (1988) and has flourished after Kuttner (2001) showed how to use Federal Funds Futures contracts to measure market perceived monetary policy surprises. Gürkaynak et al. (2005) have shown how to extract market-based measures of monetary policy communication using high frequency data and factor rotations.
Similar work also exists for the euro area, beginning with the important contributions of Brand et al. (2010). Following the US focused work of Gertler and Karadi (2015), euro area research using proxy VARs, where high frequency market-based monetary policy surprises are used as instruments in VARs to identify lower frequency monetary policy shocks are also carried out (Jarocinski and Karadi 2018, Andrade and Ferroni). The common theme among these papers, other than their event study-based research design, is the need to construct databases of high frequency asset price changes around policy announcements. Finding and cleaning this data is not easy, especially if the work is to be on intraday data.
This column explains the contents of the Euro Area Monetary Policy Event-Study Database (EA-MPD), which presents intraday asset price changes for the history of ECB Governing Council announcements, and will be kept updated by the authors. We explain the database in detail and use it for policy analysis purposes ourselves in Altavilla et al. (2019).
Monetary policy announcements work differently in the euro area than in the US. The policy decision and the statement are announced at different times by the ECB, hence it is easier to separate the policy action surprise from the surprise stemming from the statement. The press release, containing the policy decision (including the policy decision concerning non-standard measures since March 2016) is released at 13.45, followed by a press conference that begins at 14.30, when the President reads a statement and does a Q&A session. The press conference statement is similar to the US FOMC statement in providing a rationale for the policy decision, and presenting an outlook that market participants often find informative about the future course of monetary policy.
Using fine intraday data, we measure asset price changes for the Press Release Window, the Press Conference Window, and their union, the Monetary Event Window. In constructing the database, we first cleanse the data of misquotes, which were prevalent especially early in the sample, then report in the EA-MPD the changes from the pre-event quote to the post-event quote for each communication window. The quotes are the median prices/yields in each interval, where we discretise the data by taking the last quote for each minute in the interval. Figure 1 shows this timeline, and the windows we use, in stylised form.
Figure 1 Event day timeline
The EA-MPD reports the asset price/yield changes we construct for the three event windows in separate worksheets. The assets covered are the Overnight Index Swap (OIS) rates with 1, 3, 6 month and 1 to 10, 15, and 20 year maturities, German bund yields with 3 and 6 month and 1 to 10, 15, 20, and 30 year maturities, French, Italian, and Spanish sovereign yields with 2, 5, and 10 year maturities, the stock market price index and the stock price index comprising only banks, and the exchange rate of the euro.
To provide an illustration of the (cleansed) intraday data, Figure 2 shows the 2-year OIS rate on four different policy meeting dates – 4 July 2013, 4 September 2014, 3 December 2015, and 7 September 2017. We select the 2-year rate as it is of sufficiently long maturity to display movements in response to announcements of non-standard as well as standard measures. EA-MPD reports changes around the two vertical lines, denoting the times of the press release and the press conference. Figure 2 makes it clear why these two windows should be separated.
Figure 2 Examples of different market reactions across windows
Note: Cleansed and aggregated data derived from Reuters Historical Tick data.
These four panels are illustrative of the different cases in which the monetary policy surprises may arise within the policy meeting day.
Panel (a) displays no reaction of the 2-year OIS rate in the press release window and a reaction in the conference window. This episode corresponds to the ECB announcement in the press conference, for the first time ever, of formal Forward Guidance on the future path of its policy rates, by stating that policy rates are expected to remain at present or lower levels for an extended period of time.
Panel (b) shows a reaction in the press release window, with no further news affecting the OIS rate in the conference window. This episode corresponds to the announcement of a cut in the ECB deposit rate announced in the press release.
Panel (c) depicts a policy date in which there are sizeable movements in both windows. This episode captures the financial markets' disappointment following the ECB decision to increase the size of its QE program – markets evidently were expecting a larger increase of QE, as well as a cut in the policy rate, as suggested also by survey expectations among financial analysts gathered ahead of the policy meeting.
Lastly, panel (d) shows a day in which there is no surprise, either in the press release or the conference windows. Policy dates like these are surprisingly rare – there is usually some news for the financial markets, especially in the press conference window.
Figure 3 shows the changes in the OIS yield curve in the two event windows for these four policy dates. The OIS rate changes at different maturities presented in this figure are taken directly from the EA-MPD, which contains this data, and more, for all policy dates.
Figure 3 Changes in OIS yields in event windows
Note. OIS yield changes in the press release (red), and press conference (blue) windows in basis points.
The EA-MPD has coverage for a wide variety of assets, most of which extends back to the earliest days of ECB monetary policymaking. Figure 4 shows the current coverage of the database for each asset price change that is reported. The database will be periodically updated by the authors.
Figure 4 EA-MPD data coverage
Note. Sx7E is the bank stocks index, STOXX50E is the broad stock index, JPY, GBP, and USD are exchange rates, FRXXY, ESXXY, ITXXY, and DEXXY, FRXXY ITXXY ESXXY are sovereign bond yields of Germany France, Italy, and Spain, at XX-year maturities, OISXXY(M/W) are Overnight Index Swap yields at XX-year, month, or week maturity.
We have used this database to extract market-implied latent factors that drive yield curve changes on policy days and found that monetary policy communication in the euro area has always been multi-faceted, that a single ‘communication’ measure was never sufficient to capture the market reaction in the Press Conference window (Altavilla et al. 2019a). We present the main findings of that analysis in a separate VoxEU column (Altavilla et al. 2019b).
We hope this dataset we have constructed and made available will be the default choice of data for empirical work on euro area monetary policy and will foster more research with a European focus.
Altavilla, C, L Brugnolini, R Gürkaynak, R Motto, and G Ragusa (2019a), “Measuring euro area monetary policy”, CEPR Discussion Paper no. 13759 (forthcoming in the Journal of Monetary Economics).
Altavilla, C, L Brugnolini, R Gürkaynak, R Motto, and G Ragusa (2019b), "Monetary policy in action: Multiple dimensions of ECB policy communication and their financial market effects", VoxEU.org, 4 October.
Brand, C, D Buncic, and J Turunen (2010), “The impact of the ECB monetary policy decisions and communication on the yield curve”, Journal of the European Economic Association 8(6): 1266-98.
Cook, T, and T Hahn (1989), “The effect of changes in the federal funds rate target on market interest rates in the 1970s”, Journal of Monetary Economics 24(3): 331-351.
Gertler, M, and P Karadi (2015), “Monetary policy surprises, credit costs, and economic activity”, American Economic Journal: Macroeconomics 7(1): 44-76.
Gürkaynak, R, B Sack, and E Swanson (2005), “Do actions speak louder than words? The response of asset prices to monetary policy actions and statements”, International Journal of Central Banking 1(1): 55-93.
Jarocinski, M and P Karadi (2018), “Deconstructing monetary policy surprises: the role of information shocks”, ECB Working Paper, 2133.
Kuttner, K (2001), “Monetary policy surprises and interest rates: Evidence from the fed funds futures market”, Journal of Monetary Economics 47(3): 523-44.