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The effects of a greater central bank credibility on interest rates level and volatility response to news in the U.K

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  • Tuysuz, Sukriye

Abstract

This paper investigates the impact of British macroeconomic and monetary news on English interest rates level and volatility. These news correspond to Bank of England (BoE) target variables news and to unexpected monetary policy rate changes. It analyzes whether the market rate response to these news has changed since the Bank of England (BoE) was granted operational independence in May 1997. It also checks if this credibility measure has increased the predictability of BoE decisions by the market. The results reveal that after May 1997, financial markets appears better able to anticipe BoE policy decisions than before May 1997. However, Bank of England target variable news announcements and policy rate changes diffusion influence more English interest rate volatility after May 1997. This results suggests that the credibility and/or transparency of BoE might have decreased after 1997. However, the closer evolution of the realized inflation around the target fixed by the BoE and the evolution of the transparency and credibility index suggest that the BoE transparency and credibility degree increase since 1997 compare to the period prior to 1997. One possible explanation of this last results rests on uncertainty created by the several financial crises (the Asian crisis (July 1997), the Russian crisis (August 1998), the bursting of the technology and internet bubble in 2002 in USA).

Suggested Citation

  • Tuysuz, Sukriye, 2007. "The effects of a greater central bank credibility on interest rates level and volatility response to news in the U.K," MPRA Paper 5263, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:5263
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    2. Óscar Reinaldo Becerra & Luis Fernando Melo Velandia., 2009. "Transmisión de Tasas de Interés bajo el Esquema de Metas de Inflación: Evidencia para Colombia," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 46(133), pages 107-134.
    3. Tuysuz, Sukriye, 2007. "The asymmetric impact of macroeconomic announcements on U.S. Government bond rate level and volatility," MPRA Paper 5381, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monetary policy; announcements; news; credibility; transparency; term structure of interest rates; GARCH;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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