The shock of monetary policy VOX, CEPR policy portal

Philip Gyan, Maximilian Schleritzko, Mike Schmeling and Christian Wagner 01 August 2022

A standard approach to assessing monetary policy shocks is to measure high-frequency market price reactions around central bank announcements (e.g. Nakamura and Steinson 2018). Economic theory then works to provide an economic explanation for these price-based shocks. For example, researchers will estimate the news embedded in a monetary policy announcement by comparing two-year interest rate levels shortly before and shortly after the announcement. If rates rise, the announcement is interpreted as the release of news that leads to an upward shift in expectations about the path of future short rates (see, for example, Bauer and Swanson 2022 for an overview of this literature).

In a recent paper (Gnan et al. 2022), we proposed to detect monetary policy shocks directly from the content of central banks’ verbal communications with the public. Put another way, instead of inferring an economic explanation indirectly from asset price movements, we link market responses directly to what a central bank actually says.

Extract news from central bank communications

In our empirical analysis, we study the ECB, which has implemented a consistent communication strategy since its inception. The ECB announced the policy decision after the Governing Council meeting and held a press conference 45 minutes later. The press conference began with a pre-recorded statement by the ECB president to explain policy decisions and elaborate on the economic outlook. This statement discusses five issues: Rate guidelines, economic activity, inflation, monetary and fiscal conditionsAnd Fiscal policy.

Using textual analysis, we measure the ECB’s position on each of these issues for press conferences between January 2002 and July 2020. for this Rate Guidelines, we use a manual classification to distinguish indications of easing (-1), unchanged policy (0), and tightening (1). To measure positions on other issues, we measure the ECB’s tone by assessing the prevalence of negative words in topic discussions and construct measures of position such that a higher value indicates a more positive tone. Figure 1 shows that subject-specific measures of ECB stance outcomes are well aligned with key macroeconomic events and turning points in the euro area.

Figure 1 Subject-specific ECB position

To assess the actual news embedded in the ECB’s statements, we cover a wide range of monetary, economic and policy (communication) variables.

Central bank news and asset prices

We begin by examining the effect of changes in the ECB’s subject-specific stance on the risk-free interest rate across the entire term structure, the core-periphery sovereign yield spread, and the euro exchange rate.1 Figure 2 shows how asset prices react to subject-specific news in the short window around the ECB press conference. We plot price sensitivities that are significant at least at the 10% level, with darker shading indicating higher levels of significance.

Figure 2 Asset price sensitivity to news communicated by the ECB

Contact the ECB about Rate Guidelines Short-term OIS rates are mostly influenced by future interest rates, such as unusual news coupled with higher 3-month and 2-year rates. More positive communication about economic activity Most important for 2-year rates, where news Financial and financial status Accelerated rates at the long end of the yield curve (10-year). Financial and financial status Good news related to the appreciation of the euro against the dollar, pound and yen has a strong impact on the euro exchange rate. This finding is consistent with recent research on the role of financial intermediaries in currency markets (e.g. Gabaix and Maggiori 2018). Furthermore, we show that there is a positive ECB correlation Fiscal policy Spanish and Italian versus German government bond yield spreads narrowed significantly. Finally, we find that any inflation news is correlated with other factors in our sample period.

It is important to note that market reactions to subject-specific news may vary over time. Figure 3 illustrates such a time-variation for Fiscal policy News, which shows a particularly strong response to sovereign spreads during the European debt crisis (e.g. Mueller et al. 2017). In light of the current rise in sovereign spreads, this finding suggests communication about Fiscal policy Can be an effective tool in times of crisis.

Figure 3 Sovereign sensitivity spills over into fiscal policy news

Comment: At a given time, the sensitivity is estimated from the previous 60 press conferences.

Monetary policy pushes through the lens of central bank communication

Our text-based, topic-specific news measures allow the validation of economic interpretations related to price-based measures of monetary policy shocks (see Aruba and Drechel 2022 for an example of an alternative approach based on CB communication). Recent literature has proposed a range of such shock mechanisms based on the joint response of interest rates to different maturities and/or stock prices. Figure 4 summarizes how the three sets of shock measures proposed by previous studies can be linked to the subject-specific news we detect from ECB statements.

Figure 4 Monetary policy sensitivities hit the news communicated by the ECB

We begin with shocks to the interest rate term structure, identified in terms of the three factors proposed by Altavilla et al. (2019): a timing factor (which reflects short-term yields), forward guidance (the middle of the yield curve), and a quantitative easing (QE) factor (longer-term yields). Supporting the interpretations in Altavilla et al. (2019), we find that their timing is driven by news about factors Rate GuidelinesTheir forward guidance factor is significantly related to news economic activityWhereas their QE factor is mostly driven by news Financial status

Next, we study shocks identified from the joint response of interest rates and stock prices, which previous research has used to separate price effects due to changes in monetary policy from effects due to other information released by central banks (e.g. Nakamura and Steinson 2018, Miranda-Agrippino and Ricco 2021, Jarociński and Karadi 2018, Cieslak and Schrimpf 2018). The insight to distinguish policy shocks from information shocks through sign restrictions on interest rates and stock returns follows. Suppose a central bank announces an unexpected increase in interest rates. If there is a policy shock, one should observe that stock prices fall due to higher discount rates. Conversely, in the event of an information shock from unexpectedly good news about the economy, higher cash-flow expectations should also result in an increase in stock prices. Our text-based ECB news measures allow us to verify such a price-based interpretation, and we do so for two sets of shock measures.

First, we identify policy and information shocks as suggested by Jarociński and Karadi (2018). Our findings suggest that price-based interpretations are consistent with the actual news communicated by the ECB: news about policy shocks loads significantly. Rate GuidelinesWhere information shocks are significantly related to news economic activity (But not news about rI ate the instructions), therefore, our results support the concept of information shock policy as a distinct dimension of the news disseminated by the ECB.

Second, we follow Cieslak and Schrimpf (2018), who consider financial and growth shocks, similar to those of Jarociński and Karadi (2018), and additionally risk premium shocks; Additional structure in their identification arises from using short- and long-term interest rates. Consistent with their interpretation, we find that financial shocks are closely related to news rate guidelines, Growth spurts are most closely related economic activityAnd that risk premium is significantly affected by news about the shock Financial status The last result is, again, consistent with the role of intermediaries for asset prices.


Our findings show that news taken directly from the ECB’s press conference statements can be useful in understanding how market prices of various assets react to central bank announcements. Using our text-based approach avoids relying on indirect explanations that are common in the literature on monetary policy shocks; Instead, economic rationality derives directly from central bank communication.

By fine-tuning their subject-specific communications, central banks can influence different segments of financial markets in different ways, which should be particularly effective in volatile times. The time-varying nature of communication effects suggests that market participants are concerned with different issues at different times, and it is conceivable that inflation communication may become more important in the current macroeconomic environment.


Altavilla, C, L Brugnolini, RS Gürkaynak, R Motto and G Ragusa (2019), “Measuring Euro Area Monetary Policy”, Journal of Monetary Economics 108: 162–179.

Auroba, B and T Drechel (2022), “Primitive Monetary Policy Shocks: A Natural Language Approach”,, 17 May.

Bauer, MD and ET Swanson (2022), “A Reassessment of Monetary Policy Surprises and High-frequency Identification”, CEPR Discussion Paper No. 17116.

Cieslak, A and A Schrimpf (2018), “Financial and non-financial news in central bank communications”,, 22 0ctober.

Ehrmann, M, S Holton, D Kedan and G Phelan (2022), “Views on monetary policy communication by former ECB policymakers”, 17 January 2022.

Gabaix, X and M Maggiori (2015), “International Liquidity and Exchange Rate Dynamics”, Quarterly Journal of Economics 130(3): 1369-1420.

Gnan, P, M Schleritzko, M Schmeling and C Wagner (2022), “Deciphering Monetary Policy Shocks”, CEPR Discussion Paper No. 17295.

Jarocinski, M and P Karadi (2018), “Policy and economic news transmission in US Federal Reserve announcements”,, 03 October.

Miranda-Agrippino, S and G Ricco (2021), “The transmission of Monetary Policy Shocks”, American Economic Journal: Macroeconomics 13(3): 74-107.

Mueller, P, A Tahbaz-Salehi and A Vedolin (2017), “Exchange Rate and Monetary Policy Uncertainty”, The Journal of Finance 72(3): 1213-1252.

Nakamura, E and J Steinson (2018), “High-Frequency Detection of Fiscal Non-Neutrality: Information Effects”, Quarterly Journal of Economics 133(3): 1283-1330.


1 All data are from the European Area Monetary Policy Database (EA-MPD) (see Altavilla et al. 2019).

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