International Finance Discussion Papers (IFDP)
July 2024
Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock
Christoph E. Boehm and T. Niklas Kroner
Abstract:
Existing high-frequency monetary policy shocks explain surprisingly little variation in stock prices and exchange rates around FOMC announcements. Further, both of these asset classes display heightened volatility relative to non-announcement times. We use a heteroskedasticity-based procedure to estimate a “Fed non-yield shock”, which is orthogonal to yield changes and is identified from excess volatility in the S&P 500 and various dollar exchange rates. A positive non-yield shock raises stock prices in the U.S. and around the globe, and depreciates the dollar against all major currencies. The non-yield shock is essentially uncorrelated with previous monetary policy shocks and its effects are large in comparison. Its strong effects on the VIX and other risk-related measures point towards a dominant risk premium channel. We show that the non-yield shock can be related to Fed communications and that its existence has implications for the identification of structural monetary policy shocks.
Keywords: Federal Reserve, Monetary Policy, Stock Market, Exchange Rates, Asset Prices, Risk Premia, Information Effects, High-frequency Identification
DOI: https://doi.org/10.17016/IFDP.2024.1392
PDF: Full Paper
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