Amid the chaos over the government shutdown and trade talks, many Americans are wondering if they can trust experts. The president fired the head of the Bureau of Labor Statistics over a jobs report that showed fewer gains than expected, and trust in all kinds of institutions is down. But what do the latest economic news actually mean for the economy?
Basic economic thinking suggests certain rela- tions between economic announcements and financial asset prices, such as bond yields, stock prices, and exchange rates. For example, announcements about economic strength are likely to lead to higher interest rates because they indicate a higher risk of inflation.1
In this article, we test these assumptions by analyzing how various economic announcements impact the price of stocks, bonds, and the dollar. We find that only a few announcements–namely, nonfarm payrolls, GDP advance releases, and a private sector manufacturing report–generate stock price responses that are economically significant and measurably persistent. However, the magnitude of these responses is much smaller than those implied by standard regressions. In part, this reflects the fact that our news measures are riddled with measurement errors and other informational noise that accumulates between surveys of forecasters and the release of the actual indicator data. We propose an alternative estimation approach that uses a “true news” measure to clean the estimated asset price response of these error and informational noise. The Rigobon-Sack estimates of asset price responses are comparable to those generated by our standard OLS methods, but with the added benefit of being free from the informational noise that contaminates the standard estimates.
About the Author
