The US Monetary Policy Surprise:  Taking Stock of the US Treasury Yield Curve 

Presentations:

Monetary Policy Paper Session - AEA 2026 (Upcoming)

Society of Financial Econometric Summer Workshop 2024,   

Northwestern University (Kellogg)

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I decompose the daily change of the US Treasury yield curve following 257 FOMC announcements from the 1st of February 1995 to the 31st of January 2024 into its surprise and anticipated change in the short- (slope), medium- (curvature) and long-term (level) factors that make up the US Treasury yield curve. I further deploy a novel identification strategy to identify the daily surprise change as the US monetary policy surprise. I established three key findings: First, the level, slope, and curvature surprise are uniquely identified as the surprise changes in the Large Scale Asset Purchase (LSAP), forward guidance, and federal funds rate. Second, I documented the growing role of forward guidance in monetary policy transmission in the US as evidenced by the increasing influence of the surprise change to the curvature factor on the daily change of the US Treasury yield curve after the 2008-2015 Zero Lower Bound (ZLB) period. Third, my estimation shows that when the Fed is not constrained at the ZLB and maintains interest rate amid tightening episodes after the introduction of forward guidance in October 2007, they can achieve nearly the same results as cutting interest rate since the whole yield curve shifts down by at least 0.025 percentage points on average.

US Monetary Policy Surprise and Bank Behavior: Data Lessons from Banks in 60 Countries

Presentation: 

The previous version was presented at the American Economic Association Meetings 2022 Poster Sessions under the title: 

U.S. MONETARY POLICY SURPRISE AND FINANCIAL INSTITUTIONS’ BEHAVIOR: DATA LESSONS FROM BANKS AND INSURANCE COMPANIES IN 72 COUNTRIES

I am grateful to both the Australian Prudential Regulation Authority and the Reserve Bank of Australia for funding this study as part of my dissertation under the Brian Gray Scholarship. I would like to acknowledge the New York University Global Volatility Lab for their immense generosity and support in providing both the daily leverage ratio data and the guidance on using the data set.

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I quantify the US monetary policy spillover to banks in and outside the US as their leverage adjustments to the unexpected aspects of 156 scheduled FOMC announcements from 2000 to 2019 through the net foreign exposure channel and behavior channel. I found three patterns of banks’ behavior a day after, midway through, and a day before the next FOMC announcement: First, banks reduce their equity in response to an FOMC announcement, except during the 2008-2015 ZLB period. Second, forward guidance from the Federal Reserve has a significant influence on banks outside the US and zero influence on US banks in all periods. Third, banks outside the US adjust their leverage conditional on their net foreign exposure when the USD is cheaper (after a monetary policy easing), while US banks adjust their leverage conditional on their net foreign exposure when the USD is expensive (after a monetary policy tightening), suggesting an underlying mechanism of constraint-based versus profit-based adjustment.

A New Narrative on Bank Leverage: Suggestive Evidence from France, Indonesia and Japan

Presentation: 

The upcoming version will be presented at the American Economic Association Meetings 2025 Poster Session

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Through a descriptive analysis of bank balance sheets and income statements of banks in France, Indonesia, and Japan, I document three observations: (1) banks are increasing their equity cushion via the accumulation of retained earnings, (2) they prefer low leverage even at the expense of maintaining the same level of Return on Equity (ROE) and they continue lowering their leverage throughout 2013-2019, (3) the different level of their leverage is likely due to different constraints in each country, and yet all banks in the three countries saw their leverage went down throughout 2013-2019 as the result of increasing equity cushion aggressively via retained earnings. This suggests a new, albeit unjustified narrative of "equity begets equity" post-Basel III, providing further avenues for theoretical studies on bank behavior. The observation that banks prefer to raise equity over maintaining their ROE suggests a possible shift in the banks' objective from achieving the highest ROE to levering down as banks view low leverage as a positive signal to investors amid stagnancy in their net income.