Does anyone listen when politicians talk? the effect of political commentaries on policy rate decisions and expectations

Abstract

This paper investigates the effects of political commentaries on policy rate decisions and policy expectations in the United States and the euro area. The results suggest that political commentaries do influence policy rate expectations in both regions, even after controlling for macroeconomic releases and immediate interest rate expectations. During the precrisis period, the European Central Bank seems to have steered its policy in line with political commentaries that suggested further easings, consistent with market expectations. Meanwhile, market participants expected the Fed to tighten policy in response to hawkish comments in the post-2007 period.