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Learning the rules of the new game? Comparing the reactions in financial markets to announcements before and after the Bank of England's operational independence

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  • Ana Lasaosa

Abstract

The subject of this paper is how the increase in transparency brought about by the Bank of England's operational independence has changed the way in which markets react immediately after economic announcements. Other things being equal, the increase in transparency of the new framework will make monetary policy more predictable once the latest macroeconomic data are known. On this view, the market will be less sensitive to interest rate decisions and more sensitive to macroeconomic data releases. Previous research on the subject showed a more muted reaction to macroeconomic releases in the United Kingdom after 1997, and suggested that markets were still learning the rules of the new monetary framework. With two more years of data and a complementary analysis of trading activity, this study finds that macroeconomic announcements continue to move the markets less in the post-independence period, and interest rate changes the same or more. A separate analysis of the surprise announcements and the surprise component of each announcement reveals a similar pattern. Nor is the possibly greater impact of international announcements - another candidate explanation - borne out by the data. Finally, the paper finds that the reactions to macroeconomic announcements are in fact stronger in the second half than in the first half of the post-independence period. An increase in transparency is not the only change brought about by operational independence. Among other things, the collective nature of the Monetary Policy Committee and a perceived shift towards a more implicit policy rule since operational independence may have made its decisions harder to anticipate, thus decreasing the response to macroeconomic releases and increasing the reaction to monetary policy decisions.

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  • Ana Lasaosa, 2005. "Learning the rules of the new game? Comparing the reactions in financial markets to announcements before and after the Bank of England's operational independence," Bank of England working papers 255, Bank of England.
    • Handle: RePEc:boe:boeewp:255
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    Cited by:

    1. Kia, Amir, 2017. "Monetary policy transparency in a forward-looking market: Evidence from the United States," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 597-617.
    2. Iris Biefang-Frisancho Mariscal & Peter Howells, 2007. "Monetary Policy Transparency in the UK: The Impact of Independence and Inflation Targeting," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(5), pages 603-617.
    3. Lavan Mahadeva, 2007. "A model of market surprises," Bank of England working papers 327, Bank of England.
    4. Amir Kia, 2011. "Developing a Market-Based Monetary Policy Transparency Index: Evidence from the United States," Economic Issues Journal Articles, Economic Issues, vol. 16(2), pages 53-80, September.
    5. Orla May & Merxe Tudela, 2005. "When is mortgage indebtedness a financial burden to British households? A dynamic probit approach," Bank of England working papers 277, Bank of England.
    6. Michael Ehrmann & David Sondermann, 2012. "The News Content of Macroeconomic Announcements: What if Central Bank Communication Becomes Stale?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 1-53, September.
    7. Reeves, Rachel & Sawicki, Michael, 2007. "Do financial markets react to Bank of England communication?," European Journal of Political Economy, Elsevier, vol. 23(1), pages 207-227, March.
    8. Stephen Millard, 2022. "Central Bank Communication: Never Excuse, Never Explain," National Institute of Economic and Social Research (NIESR) Policy Papers 33, National Institute of Economic and Social Research.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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