Document Type

Working Paper

Abstract

We examine the spillover effect of speeches delivered by the Federal Reserve Board of Governors on sovereign credit risk and findthat the tone of speeches especially those that are forward looking negatively impacts sovereign credit spreads. Cross-sectionally, theimpact is stronger for countries with high external debt and thosewith high exchange rate stability. The negative relationship betweenFed speech tone and sovereign spreads is exacerbated in the presenceof monetary policy shocks, economic policy uncertainty, and a loosemonetary policy stance, and is likely channeled via the macroeconomiccontent embedded in speeches. We also show that Fed speeches delivered 1–4 weeks prior to FOMC meetings contain advance information,which can be used to explain variation in CDS spreads around FOMCannouncements. We further decompose the sovereign credit spread toexamine the impact of speeches on the credit risk premium and find asignificant positive impact on it. Our results indicate that while Fedspeeches contain important information about economic conditions inthe US, they can have a major influence on the perceived creditworthiness of other countries as well.

Publication Date

1-8-2024

Publisher

Indian Institute of Management Bangalore

Relation

IIMB Working Paper-697

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