Template-Type: ReDIF-Paper 1.0


Author-Name: Federico Di Pace
Author-X-Name-First: Federico
Author-X-Name-Last: Di Pace

Author-Name: Giacomo Mangiante
Author-X-Name-First: Giacomo
Author-X-Name-Last: Mangiante

Author-Name: Riccardo Masolo
Author-X-Name-First: Riccardo
Author-X-Name-Last: Masolo
Author-Email: riccardo.masolo@unicatt.it
Author-Workplace-Name: Università Cattolica del Sacro Cuore
Author-Workplace-Name: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore


Title: Monetary policy rules: the market’s view.


Abstract: We study the market-perceived monetary policy rule of the Bank of England (BoE)
using financial market data and macroeconomic surprises. Leveraging exogenous
variations in inflation and industrial production (IP) surprises around Office
for National Statistics releases, we estimate gilt yield responsiveness to inflation
and real activity, revealing how markets expect the BoE to react to macroeconomic
changes. Markets generally understand the UK flexible inflation-targeting
regime, revising both inflation expectations and short-term rates upward after inflation
surprises. We identify two key nonlinearities. First, perceived responsiveness
changes over time, with short-term rates responding when away from their
lower bound, and medium-term rates responding during periods of unconventional
monetary policy. Second, financial markets expect a weaker response to
inflation when it originates from supply shocks. This, however, does not translate
into a risk of de-anchored expectations. 
Length: 26
Creation-Date: 2024-12
File-URL: http://dipartimenti.unicatt.it/economia-finanza-def137.pdf
File-Format: Application/pdf
File-Function: First version, 2024
Number: def137
Classification-JEL: C10, E50, E58, G10. 
Keywords: Market Perceptions, Financial Markets’ expectations, Inflation, Yields, Monetary Policy Rule.
Handle: RePEc:ctc:serie1:def137