I thank George Dotsis, Nancy Duong, Tony Rodrigues, and Giovanni Verga for useful comments and I also thank an anonymous referee for detailed comments on an earlier draft of the paper that led to significant improvements. All remaining errors are mine. The views expressed in this paper are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.
Municipal Bonds and Monetary Policy: Evidence from the Fed Funds Futures Market
Article first published online: 15 FEB 2013
© 2013 Wiley Periodicals, Inc.
Journal of Futures Markets
Volume 34, Issue 5, pages 434–450, May 2014
How to Cite
Rosa, C. (2014), Municipal Bonds and Monetary Policy: Evidence from the Fed Funds Futures Market. J. Fut. Mark., 34: 434–450. doi: 10.1002/fut.21606
- Issue published online: 1 APR 2014
- Article first published online: 15 FEB 2013
- Manuscript Accepted: 13 JAN 2013
- Manuscript Received: 4 SEP 2012
This paper examines the impact of conventional and unconventional monetary policy on municipal bonds using a novel high-frequency dataset. I use three proxies for monetary policy surprises: the surprise change to the current federal funds target rate, the surprise component in the Federal Open Market Committee (FOMC) balance-of-risk statement, and the unanticipated announcements of future large-scale asset purchases. Estimation results show that monetary policy news have economically important and highly significant effects on municipal bond prices. Their daily responses are, however, substantially lower than the reaction of comparable Treasury notes. This work documents that market (in)efficiency, and the slow adjustment of municipal bond prices, can partially rationalize this discrepancy. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:434–450, 2014