Can Monetary Policy Surprise the Market?

Abstract

This paper extracts measures of monetary policy surprises for Australia, Canada and the United States using a latent factor framework. We distinguish monetary policy surprises which occur when central banks report new assessments of the economy (or do not reinforce changes expected by market assessments) from those when policy makers appear to change their preferences. Changing policy preferences are evident in all jurisdictions, particularly during periods of stress. No-change policy announcements have distinctly differing impacts across the three countries; in Canada these have the same impact as policy changes, in Australia they are not discernibly different to a normal trading day and the US market lies between these scenarios. The revealed differences in size and type of the policy surprise outcomes for these operationally similar central banks suggests that the role of transparency policy is more subtle than previously appreciated.

Keywords: monetary policy, central banks, latent factor model

JEL Classification: E43, E52, C38