Are US Monetary Surprises Surprising? Evidence from Global Markets

Abstract

We show that FOMC announcement surprises are predicted by preceding ECB monetary policy announcement surprises. Specifically, a 1 p.p. ECB monetary policy surprise predicts a subsequent 0.19-0.31 p.p. FOMC surprise. Movements in asset prices around the ECB meeting also predict movements around subsequent FOMC meetings. We rationalize these empirical facts with a model in which the Fed responds to non-US economic conditions more strongly than investors expect and the ECB releases growth news at the time of its announcements. Our results suggest that the Fed’s response to non-US news is an important facet of monetary policy transmission.

Presented at: Midwest Finance Association*, Midwest Finance Association PhD Symposium, Trans-Atlantic Doctoral Conference*, Federal Reserve Board of Governors*

*denotes presentation by co-author