EMPCT Working Paper Series No. 2024-05
79 pages | PDF Download | PDF in Browser
Citation:
Boehm, Christoph E, and T. Niklas Kroner, “Monetary Policy without Moving Interest Rates: The Fed Non-Yield Shock” September, 2024
Christoph E. Boehm
UT Austin and NBER
T. Niklas Kroner
Federal Reserve Board
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.
