ECB monetary policy communications: A spectrum of financial market responses

Valentin Jouvanceau, Ieva Mikaliunaite 25 February 2021



The high-frequency changes in asset prices around monetary announcements are a valuable source of information for understanding the causal effects of monetary surprises (Kuttner 2001, Gürkaynak et al. 2005). Altavilla et al. (2019a) make the identification of such effects considerably easier by regularly updating the Euro Area Monetary Policy Event-Study Database, finding that market reactions to ECB monetary surprises can be reduced to a few factors between 2002 and 2018. They also find that the effects of surprises are rather time-invariant, but their occurrence can depend on the policy issues of the moment (Altavilla et al. 2019b).

In this regard, we suspected that long-term sovereign bond yields should reflect specific actions and communications of the ECB during the euro area crisis (2009-2013). In our work (Jouvanceau and Mikaliunaite 2020), we statistically test whether the intra-day reactions of these yields capture additional dimensions of ECB monetary surprises. The tests, accounting for the responses of Spanish, Italian, and French yields at two-, five-, and ten-year maturities, lead to three new latent factors. Two factors relate to press releases and another to press conferences. We follow the usual practice of factor rotations, although with a new set of restrictions to allow for their economic interpretation (Gürkaynak et al. 2005, Swanson 2020). Figures 1 and 2 illustrate the factors identified and the associated loadings (i.e. their effects on asset yields).

Figure 1 ECB press releases

 a) Structural monetary surprises (factors)

 b) Factor loadings

Notes: Maturities of one, three, and six months and one year are OIS yields, therefore similar in all countries represented. Beyond that, the maturities are specific to each country. ‘Sov. Spread’ stands for ‘Sovereign spread’. The shaded areas represent the 95% confidence intervals around the point estimates.

In press releases, a standard ‘target’ factor weighs on short-term rates and therefore echoes unexpected changes in the ECB's key interest rates. Beyond that, we find a factor that has not been documented before (Figure 1, panel a, column 2). Note that these surprises are regularly at work. We call them ‘duration’ because they homogeneously load on the long-term yields of the core and periphery countries (Figure 1, panel b, row 2). In other words, this factor refers to the sensitivity of the price of these assets to changes in short-term rates. In addition, we discover a factor that we term ‘dovereign spread’ (Figure 1, panel a, column 3). This factor materialises from 2009 onwards and illustrates how several ECB actions can generate a widening/tightening of the spreads between long-term core and periphery yields (Figure 1, panel b, row 3). 

In press conferences, we primarily identify three types of monetary dimensions similar to those of Altavilla et al. (2019). The two path factors ‘timing’ and ‘forward guidance’ have impacts on sox-month to two-year yields (Figure 2, panel b, rows 1 and 2), while the ‘quantitative easing’ (QE) surprises put pressure on long-term yields (Figure 2, panel b, row 4). Note that we estimate that QEs have homogeneous effects at the end of the yield curve. This novelty appears because the heterogeneous effects of communications are captured in a factor we have called ‘save the euro’ (in reference to the ideas of Wright 2019). The latter is bubbling during the crisis period (2009-2013) and has repercussions mainly on the long-term yields of periphery countries (Figure 2, panel b, line 3). 

Figure 2 ECB press conferences

 a) Structural monetary surprises (factors)

 b) Factor loadings

Notes: Maturities of one, three, and six months and one year are OIS yields, therefore similar in all countries represented. Beyond that, the maturities are specific to each country. ‘FG’ stands for ‘Forward Guidance’ and ‘QE’ for ‘Quantitative Easing’. The shaded areas represent the 95% confidence intervals around the point estimates.

Naturally, one may wonder what can cause such reactions in long-term yields? Going further, we find that the ‘sovereign spread’ and ‘save the euro’ surprises reflect the revaluation of default risk premiums. On the other hand, those of ‘duration’ are mainly transmitted by the real term premiums. This provides further evidence that monetary surprises can lead to an ‘excess sensitivity’ of long-term rates beyond the expectations-hypothesis logic (Hanson and Stein 2015). Moreover, we show that a fraction of these responses correspond to ideas of ‘information’ shocks (Nakamura and Steinsson 2018, Cieslak and Schrimpf 2018, Karadi and Jarociński 2018). According to this theory, central bank communications can convey macroeconomic rather than monetary news. Thus, the overreaction of long-term rates is indicative of changes in economic fundamentals.  

However, we document many instances in which this theory has difficulty explaining the actions and commentaries of market participants. A telling example dates from 2 August 2012. During an ECB press conference on that date, Spanish and Italian 10-year yields soared by an average of 34 basis points, while German and French equivalent yields remained stable. This occurred after former ECB President Mario Draghi made his famous declaration about doing “whatever it takes to preserve the euro […]” (London, 26 July 2012). Looking at market commentaries at the time, we find that it was the unexpected absence of a QE programme that sparked these massive reactions. Under an ‘information’ shock, this absence is interpreted as positive news about the future state of the economy – in particular, that the debt burden will not be a threat. What then explains the surge in sovereign spreads?

It seems that market participants can bet differently on the future state of the world. Thus, we propose that some surprises should be considered as ‘perception’ shocks. The latter are characterised by what we regard as investor disappointment or satisfaction with an unexpected monetary decision. We document that the episodes of disappointment were, on average, characterised by a strong increase in long-term periphery yields and a combined decline in inflation and stock prices. We use these recurrences as a set of restrictions to identify the ‘Perception’ shocks in a daily VAR instrumented by our new monetary surprises. The impulse responses are shown in Figure 3. 

Figure 3 Daily VAR, instrumented by ‘duration’, ‘sovereign spread’ and ‘save the euro’ surprises

Notes: Each panel shows the impulse responses of a daily VAR linked to the shocks instrumented by the surprises of (a) ‘duration’, (b) ‘sovereign spread’, and (c) ‘save the euro’. The residuals of the variables instrumented are displayed in the first row. ‘INFL10Y’ is the ten-year inflation-linked swaps. ‘NOM10Y’ is nominal 10-year AAA-rated rates (risk-free). ‘OTH10Y’ are 10-year AAA-rated and other rates (risky). ‘STOXX600’ is the natural logarithm of Euro area stock prices.  

Responses surrounded by red 95% confidence intervals concern the crisis period (September 2008 to December 2013). In this context, ‘save the euro’ surprises exhibit all the markers of ‘perception’ shocks. Indeed, a positive shock produces a sharp increase in long-term risky rates, and a fall in inflation and stock prices. Such shocks are being encountered even more in the QE period (January 2014-September 2018). In fact, ‘sovereign spread’ and ‘save the euro’ surprises are of this nature on average (see the responses bounded by blue confidence intervals).

Our findings contribute to the overall understanding of the effects of the ECB's monetary actions and communications. The usual transmission by actions on short-term rates is one dimension among others. Indeed, revaluations of the risk on long-term assets are very frequent. Moreover, market participants may scrutinise ECB statements to the point that the absence of expected intervention can have very important repercussions on long-term yields. In this regard, the optimal design of the monetary authority's communication is a major consideration

Authors’ note: The views expressed are those of the authors and do not necessarily represent those of Bank of Lithuania.


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Jouvanceau, V and I Mikaliunaite (2020), "Euro Area Monetary Communications: Excess Sensitivity and Perception Shocks", Bank of Lithuania Working Paper Series, 79.

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Kuttner, K N (2001), “Monetary policy surprises and interest rates: Evidence from the fed funds futures market”, Journal of Monetary Economics 47 (3): 523-544.

Nakamura, E and J Steinsson (2018), “High-frequency identification of monetary non-neutrality: the information effect”, The Quarterly Journal of Economics 133(3): 1283-1330.

Swanson, E T (2020), “Measuring the effects of federal reserve forward guidance and asset purchases on financial markets”, Journal of Monetary Economics, forthcoming.

Wright, J H (2019), “Comment on ‘Measuring euro area monetary policy’, by Carlo Altavilla, Luca Brugnolini, Refet Gürkaynak, Giuseppe Ragusa and Roberto Motto”, Journal of Monetary Economics 108: 180-184.



Topics:  EU policies Financial markets Monetary policy

Tags:  Monetary policy communication, forward guidance, long-term sovereign bond yields, ECB

Senior Economist, Bank of Lithuania

Senior Economist, Bank of Lithuania


CEPR Policy Research