Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area

48 Pages Posted: 25 Oct 2018 Last revised: 29 Apr 2020

See all articles by Philippe Andrade

Philippe Andrade

Federal Reserve Banks - Federal Reserve Bank of Boston

Filippo Ferroni

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: July, 2018

Abstract

We use financial intraday data to identify monetary policy surprises in the euro area. We find that monetary policy statements and press conferences after European Central Bank (ECB) Governing Council meetings convey information that moves the yield curve far out. Moreover, the nature of the information revealed in a narrow window around these statements and press conferences evolved over time. Until 2013, unexpected variations in future interest rates were positively correlated with the changes in market-based measure of inflation expectations consistent with news on future macroeconomic conditions. That negative correlation disappeared roughly when forward guidance on future rates started to be given by the Governing Council. We use conditions on the joint reaction of expected interest rates and inflation rates to disentangle the two types of monetary policy shocks (i.e. the Delphic and Odyssean monetary policy surprise). A surprise that lowers future interest rates does not engineer a boom. A surprise that lowers future interest rates because it signals future accommodation does.

Keywords: monetary policy, signaling, forward guidance, high frequency data, VAR with instrumented proxy, euro area

JEL Classification: C10, E32, E52

Suggested Citation

Andrade, Philippe and Ferroni, Filippo, Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area (July, 2018). FRB of Chicago Working Paper No. WP-2018-12, Available at SSRN: https://ssrn.com/abstract=3272644 or http://dx.doi.org/doi.org/10.21033/wp-2018-12

Philippe Andrade (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Filippo Ferroni

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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