Macroeconomic releases, volatility and market reactions: a deeper insight into semistrong efficiency

This work deals with the monetary policy choices that both the FED and the ECB have been carrying out since 1995, with a particular focus on how they have tried to face the current financial turmoil. Basically, we will compare their strategies running two VARs: one for the EU and the other for the USA, in this way, we will be able to describe the various transmission mechanisms as well as their relative importance in the two economic systems under analysis. Both VAR models can be divided into 4 parts: 1. The non-policy block containing some basic macroeconomic indicators ; 2. A long term interest rate spread; 3. The policy block to which belongs the monetary policy instrument ; 4. Some policy indicators , which prove useful when giving a broad assessment of the monetary policy stance. Our empirical findings show that financial asset prices together with the exchange rate are the two outstanding transmission mechanisms both in the US and in the EU, as a consequence they can be thought of as powerful recovery drivers in the light of the recent crisis. More traditional channels (such as the interest rate one) seem to play a marginal role, especially in the US. What is more, our VARs reveal a widespread lagged response of macroeconomic variables to short term rate shocks: actually, it takes the latter between 9 and 15 months (on average) to have their full effect. The overall impact of monetary policy (as a stabilization tool) tends to be higher in the USA if compared to the EU, even though this comes together with a higher risk of future inflationary pressures. The logical consequence is that the US is likely to be more affected by the expansionary measures that have been taken to face the current financial crisis, although the claw-back will not probably come earlier there than the in EU.