In a BIS working paper, researchers Anna Cieslak and Andreas Schrimpf quantify the importance of non-monetary news in central bank communication. Using evidence from four major central banks and a comprehensive classification of events, they decompose news conveyed by central banks into news about monetary policy, economic growth, and separately, shocks to risk premia. The approach exploits high frequency comovement of stocks and interest rates combined with monotonicity restrictions across the yield curve.
Building on a macro-finance model of asset prices, researchers obtain predictions of how different economic shocks influence the direction of the co-movement between stocks and yields and its strength along the yield curve. A conventional monetary shock affects the real interest rate, causing equity prices and bond yields to move in opposite directions, this effect being stronger at short maturities. Shocks to both growth expectations and risk premia cause equity prices and bond yields to move in the same direction. To discriminate between these two types of shock, we exploit the fact that their effects differ in the yield maturity dimension. Growth shocks have a greater effect on the short-to-intermediate part of the yield curve, whereas risk premium shocks more strongly affect its long segment.
Researchers found significant differences in news composition depending on the communication channel used by central banks. Non-monetary news prevails in about 40% of policy decision announcements by the Fed and the ECB, and this fraction is even higher for communications that provide context to policy decisions such as press conferences. They show that non-monetary news accounts for a significant part of financial markets’ reaction during the financial crisis and in the early recovery, while monetary shocks gain importance since 2013.