New Measures of Monetary Policy Surprises and Jumps in Interest Rates

The paper proposes new measures of unexpected monetary decisions to characterise two important dimensions of the European Central Bank's monetary policy. Our new surprise measures outperform compellingly the traditionally used monetary shocks in explaining daily variation of euro area interest rates in the standard event-study framework. We also build an econometric model which disentangles diffusive information arrivals from jumps, and study the extent to which the ECB's decisions caused jumps in euro area interest rates. The new surprise variables prevail again in most cases upon the traditional surprises. Jumps play a great role in the variation of interest rates and the ECB induced several jumps with its decisions, especially in the first half of the sample, but its predictability has improved considerably later. We extend our analysis to the period of the recent financial turmoil and find that, although the market-based measures become somewhat distorted due to money market tensions, our model still provides a meaningful characterisation of market rates and an interesting insight into interest rate behaviour during the crisis