Monetary Momentum: A Worldwide Phenomenon Explained

Absztrakt (kivonat)

I analysed the movements of asset prices surrounding the scheduled announcements of the Federal Open Market Committee. Using daily returns between 1994 and 2019, 55 instruments from four asset classes resembled a significant return drift that is conditional on expansionary and contractionary monetary policy surprises. To understand this phenomenon, referred to as ‘monetary momentum’ in the literature, I investigated factors with panel regression that could affect the return drift. Concluding that uncertainty about the future path of monetary policy weakens the transmission of policy shocks to financial markets and so does a period of severe economic downturn. Meanwhile, general market uncertainty seems to increase returns around policy decisions. I also intended to provide an explanation for significant asset price movements that begin before the Committee’s decision. By analysing the predictability of policy shocks, macroeconomic forecasts are shown to be good leading indicators that outperform standard forecasting methods. The results are robust to different measures of monetary policy surprises and subsamples.