Monetary Policy Surprises and the Responses of Asset Prices: An Event Study Analysis

Abstract

The monetary policy shocks have been widely regarded to have effects on the financial markets. Before the 2008 financial crisis, the Federal Reserve adjusted the federal funds target rate to implement the monetary policy. This paper uses event studies to examine the relationship between the Federal Reserve's interest rate decisions and the asset prices. We find that treasury bills and exchange rates of the developed countries were significantly influenced by the Fed's unexpected monetary policy shocks from the year 1989 to 2008. However, in the same period, exchange rates of the emerging markets responded weakly to the policy surprises. We also observe that international equity markets and commodity prices were not sensitive to the rate decisions of the Federal Reserve. In addition, Treasury bill yields responded significantly to the anticipated and unanticipated rate decisions in both pre and post FOMC meeting days. We also show that the Fed's unexpected monetary policy had significant 5-day post-announcement impacts on prices of almost all assets.