Macroeconomics and Monetary Policy: Announcements, Beliefs, Emotions and Puzzles
Paper Session
Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)
- Chair: Yoosoon Chang, Indiana University
Disagreement and the Macro Announcement Day Returns
Abstract
Announcement day returns exhibit substantial variability across different macro variables. This paper argues that the heterogeneity in announcement day returns can be attributed to shifts in investor disagreement of stock returns on macro announcement days. To quantify this disagreement, we introduce a novel measure by examining the distribution function of investor beliefs on S&P 500 returns using daily index option order imbalances. We then decompose this total disagreement into two components: uncertainty and differential interpretation. The former measures the dispersion in pre-announcement forecasts of macroeconomic news, while the latter captures disparities among investors in their perceptions of how the re- lease of such news influences future stock returns. Our empirical analysis indicates that this decomposition of disagreement effectively accounts for the heterogeneity in announcement-day returns across different macro variables. Finally, we incorporate heterogeneous beliefs into an asset pricing model. Our model suggests that both the resolution of uncertainty and variations in the interpretation of macroeconomic announcements play significant roles in understanding announcement-day premiums.Emotion in Euro Area Monetary Policy Communication and Bond Yields: The Draghi Era
Abstract
We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to precisely analyze how the vocal emotions and language of ECB President Mario Draghi affect the yields and yield spreads of major euro area economies. This novel approach to central bank communication reveals that vocal and verbal emotions significantly impact the yield curve, with effects varying in magnitude and direction. Positive signals raise German and French yields, while negative signals increase Italian yields. Our analysis of bond spreads indicates that positive communication influences the risk-free yield component, whereas negative communication affects the risk premium. Additionally, our study contributes by constructing a synchronized dataset for voice and language analysis.Resolving New Keynesian Puzzles
Abstract
New Keynesian models generate puzzles when confronted with the zero lower bound (ZLB) on nominal interest rates (e.g. the forward guidance puzzle or the paradox of flexibility). We show that these puzzles are absent in simple and medium-scale models when monetary policy approximates optimal policy, even loosely. The standard approach to modeling monetary policy at the ZLB does not approximate the policy a rational inflation targeting central bank would choose at the ZLB. It is this disconnect that is responsible for the puzzles. The puzzles, therefore, are best thought of as the plausible predictions of implausible monetary policy rather than implausible predictions to plausible monetary policy. We show how to write monetary policy rules that capture the same policy objective with and without the ZLB.Discussant(s)
Carola Binder
,
Haverford College
Klodiana Istrefi
,
Bank of France
Michael McMahon
,
University of Oxford, CEPR and CfM
Christopher Otrok
,
Federal Reserve Bank of Dallas
JEL Classifications
- C5 - Econometric Modeling
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit