A21: Monetary Policy, Intermediaries, and Asset Prices
Our project will contribute to the asset pricing literature, in particular the growing streams which focus on monetary policy or the role of financial intermediaries. Since the global financial crisis of 2008 the central role of intermediaries for financial markets has become particularly visible. It has also become evident that monetary policy and its communication can affect the behaviour of intermediaries in important ways that matter for the functioning of markets as a whole. Our project explores the interplay of financial intermediaries, monetary policy communication and asset prices with the aim of identifying an ’intermediary channel of monetary policy’. Previous research has shown that asset prices respond to monetary policy. A large part of these responses is unexpected and therefore interpreted as policy ‘shocks’. While ample evidence for such shocks clearly suggests that monetary policy matters for financial markets, and ultimately for the real economy, the key questions of why and how monetary policy matters remain, by and large, unanswered. Put differently, what exactly is it that takes markets by surprise? How does the transmission into asset prices work precisely? Motivated by these research questions, our identification approach entails two steps. First, we develop a methodology that directly connects policy shocks with policy communication. This allows us to provide an economic interpretation for and thereby a better understanding of policy shocks. Specifically, we use textual analysis of monetary policy transcripts to compile a dictionary of central bank communication that associates policy topics with keywords and common expressions used by central banks. With this dictionary, we quantify textual features of central bank communication and analyze how policy shocks can be understood through the lens of our dictionary. Second, we use our dictionary-approach to identify communication shocks that are specifically relevant from the vantage point of intermediary asset pricing theory, e.g., communication that centers around intermediaries’ ‘balance sheet’ or ‘leverage’. We will estimate the impact of these shocks from the responses of market variables that are particularly relevant for financial intermediaries and pin down the intermediary channel by exploiting differences in the extent of intermediation across asset classes as well as cross-sectional differences in intermediary characteristics. Overall, we plan to contribute to the research in this field by (i) developing comprehensive dictionaries for central bank communication, (ii) applying such dictionaries to provide an economic interpretation for policy shocks, and (iii) by measuring intermediary-specific (communication) shocks to explicitly study policy transmission via intermediaries.