Monetary policy shocks of the ECB: The effects on Norwegian asset prices and yield curve

Abstract World markets are highly interconnected, and the actions and statements of the central bank in one country may influence other countries as well. In this thesis I show that monetary policy shocks of the European Central Bank have substantial effects on Norwegian asset prices and yield curve. Using high-frequency data from 2001 to 2015 I investigate intraday changes in Eu- ropean interest rates to identify shocks to the ECB’s monetary policy. Following the methods of Gürkaynak, Sack, and Swanson (2005) I use principal component analysis to identify two factors of monetary policy shocks interpreted as a "rate setting surprise" factor and a "forward guidance surprise" factor. The forward guidance component comes from the fact that the ECB reveals information about future monetary policy to affect the medium and longer end of the yield curve. The analysis shows that monetary policy shocks by the ECB have strong and significant immediate effects on Norwegian financial variables. In brief, the rate setting surprise has strongest effects for the money market interest rates with short maturities, while forward guidance influences the yield curve with a characteristic hump shape. For very narrow time windows after the rate decision becomes public, effects of a rate setting surprise on the EURNOK exchange rate are strong and significant, but then dies out quickly. Norwegian equity prices respond negatively to a tightening rate surprise, but positively to forward guidance shocks