Market-based monetary policy uncertainty shocks in the Euro Area
Dr Umberto Collodel
In this paper we investigate how monetary policy uncertainty transmits to financial markets in the Euro Area. We introduce a novel market-based measure using daily Euro Overnight Index Swap (OIS) rate data spanning the full term structure, calculated as changes in rate dispersion within narrow windows around ECB Governing Council meetings. Across 204 meetings from 2005 to 2025, we document three main findings. First, ECB announcements exhibit substantial heterogeneity: while some reduce uncertainty, the majority increase it. Second, uncertainty changes are largely unrelated to the direction of the policy surprise but correlate positively with its absolute magnitude. Third, uncertainty changes significantly affect asset prices independently of conventional policy surprises: a one-standard-deviation increase raises 10-year nominal yields by 7 basis points, reduces Euro Stoxx 50 returns by 2 percent, and increases USD/EUR exchange rate volatility by 20 percent relative to its unconditional mean. Moreover, the effect of uncertainty on nominal yields increases linearly with maturity, implying that uncertainty shocks steepen the yield curve independently of conventional policy surprises. In a nutshell, our findings establish a monetary policy uncertainty channel in the Euro Area and suggest that features of the announcement event itself, beyond the directional policy signal, may be key drivers of market outcomes.
Market-based monetary policy uncertainty shocks in the Euro Area - ScienceDirect