RDP 2023-04: Can We Use High-frequency Yield Data to Better Understand the Effects of Monetary Policy and Its Communication? Yes and No! 6. Conclusion

This paper explores a new approach to identifying the effects of monetary policy and its communication in Australia. Following Kaminska, Mumtaz and Šustek (2021), we combine high-frequency data on changes in yields around policy announcements with an affine term structure model to decompose unexpected changes in the yield curve into different facets of monetary policy: current policy action; signalling or forward guidance about future rates; and the impact of policy on uncertainty and term premia.

Overall, this new approach to monetary policy shock identification shows some promise. It produces an intuitive lens through which to examine and understand monetary policy and its communication and provides a number of insights. For example, Path (or signalling) shocks tended to affect expected rates during periods when the RBA has signalled concerns over future economic outcomes, or communicated that rates could remain higher than otherwise due to mounting risks in the housing market. COVID-19-era policy mainly affected yields by influencing term premia, unlike normal policy announcements. And some shocks to the path of rates are predictable based on past data, indicating that markets don't fully understand how the RBA reacts to information.

We also use these surprise changes in yields around policy announcements as instruments to identify the macroeconomics effects of different facets of policy and its communication through the lens of a proxy structural vector autoregression. The approach provides results that turn out to be similar to earlier findings around the effects of monetary policy on the economy, with shocks to current policy (Action shocks) producing similar effects to standard monetary policy shocks obtained using other alternative approaches. However, it adds relatively little new information compared to existing simpler approaches, as effects of Path and Premia shocks are imprecisely estimated and Action shocks fail to overturn the price puzzle. Still, given the observed importance of these other facets of policy in moving interest rates, further work in this space could be valuable.