Deciphering Central Bank Communication: Evidence from High-Frequency Data in Korea
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This paper studies central bank communication in Korea using a high-frequency identification approach. We measure the monetary surprises by combining two sources: the policy rate announcement and the press conference. The monetary surprises contain two types of monetary news―the policy rate announcement and the future path of monetary policy, especially as conveyed during the press conference―along with the central bank’s assessment of the economic outlook. We deconstruct the monetary surprises into the current policy target shocks, the future policy path shocks, and the central bank information shocks. Our identification approach uses high-frequency comovement of interest rates and stock prices, along with monotonicity restrictions assuming different responses of long-term and short-term interest rates to each type of monetary news. We find that the future policy path shocks have greater impacts on the economy than the current policy target shocks. These two monetary policy shocks occasionally have opposite directions.
Abstract
This paper studies central bank communication in Korea using a high-frequency identification approach. We measure the monetary surprises by combining two sources: the policy rate announcement and the press conference. The monetary surprises contain two types of monetary news―the policy rate announcement and the future path of monetary policy, especially as conveyed during the press conference―along with the central bank’s assessment of the economic outlook. We deconstruct the monetary surprises into the current policy target shocks, the future policy path shocks, and the central bank information shocks. Our identification approach uses high-frequency comovement of interest rates and stock prices, along with monotonicity restrictions assuming different responses of long-term and short-term interest rates to each type of monetary news. We find that the future policy path shocks have greater impacts on the economy than the current policy target shocks. These two monetary policy shocks occasionally have opposite directions.