Does Anyone Listen when Politicians Talk? The Effect of Political Commentaries on Policy Rate Decisions and Expectations

RePEc Short ID: psc465
ORCID iD: 0000-0001-6085-0638

Demiralp, Selva; King, Sharmila; Scotti, Chiara

doi:10.17016/FEDS.2016.058

Working Paper

Does Anyone Listen when Politicians Talk? The Effect of Political Commentaries on Policy Rate Decisions and Expectations

Abstract: This paper investigates the effects of political commentaries on policy rate decisions and policy expectations in the United States and the euro area. The results suggest that political commentaries do influence policy rate expectations in both regions, even after controlling for macroeconomic releases and immediate interest rate expectations. The findings regarding the policy reaction functions reveal that market expectations are mostly rational. There is no evidence that the Federal Reserve responds to political commentaries that suggest rate hikes or easings. Meanwhile, the European Central Bank seems to have steered its policy in line with political commentaries that suggested further easings during the pre-crisis period, consistent with market expectations.

Keywords: Central bank independence; Market expectations; Unconventional policy;

https://doi.org/10.17016/FEDS.2016.058