The News Content of Macroeconomic Announcements: What if Central Bank Communication Becomes Stale?
by Michael Ehrmann and David Sondermann
European Central Bank
How do financial markets incorporate news? This paper
argues that one piece of news not only has direct effects on
asset prices and market volatility, but it can also alter the relative
importance of other news. Studying the reaction of UK
short-term interest rates to the Bank of England’s Inflation
Report and to macroeconomic announcements, this paper finds
support for the notion of interdependent news effects. With
time elapsing since the latest release of an Inflation Report,
market volatility increases, suggesting that market uncertainty
rises until the central bank updates its communication. At
the same time, the price response to other macroeconomic
announcements becomes more pronounced, and they play a
more important role in reducing uncertainty.
JEL Codes: D83, E43, E58, G12, G14.
(PDF, 53 pages 330 kb)