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Analyzing the Impact of Monetary Policy on Financial Markets in Chile

Author

Listed:
  • Alicia Garcia-Herrero

    (NATIXISand)

  • Eric Girardin

    (Aix-Marseille School of Economics, CNRS, & EHESS)

  • Hermann Gonzalez

    (Banco Bilbao Vizcaya Argentaria (BBVA))

Abstract
During the past few years, monetary policy communication has become a hot topic in as far as it seems to have become a very relevant way for central banks to guide markets, beyond actual monetary policy decisions. This paper investigates this issue empirically for the case of Chile. More specifically, using data from 2005 to 2014 and a Component GARCH model, we assess whether changes in the communication of the Central Bank of Chile generates in particular a permanent or temporary change in the volatility of interest rates, after controlling for changes in monetary policy instruments. Our results show that the volatility in interest rate futures in Chile's swap markets increases following the Central Bank's communication. However, the impact tends to be temporary instead of permanent and only statistically significant in the pre-crisis period. All in all, our results indicate a reduced relevance of Central Bank's communication for short term swap markets which may reflect that market participants have learned to anticipate changes in monetary policy communication, especially after the global financial crisis.

Suggested Citation

  • Alicia Garcia-Herrero & Eric Girardin & Hermann Gonzalez, 2017. "Analyzing the Impact of Monetary Policy on Financial Markets in Chile," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 32(1), pages 3-21, April.
    • Handle: RePEc:ila:anaeco:v:32:y:2017:i:1:p:3-21
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    References listed on IDEAS

    as
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    Cited by:

    1. Rai, Anoop & Rojer, Guido & Susanna, Edirel, 2021. "Central bank transparency and market reaction in Brazil, Chile, and Colombia," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    2. Mr. Andrea Pescatori, 2018. "Central Bank Communication and Monetary Policy Surprises in Chile," IMF Working Papers 2018/156, International Monetary Fund.
    3. Rao, Amar & Kumar, Satish & Gupta, Prashant & Dash, Saumya Ranjan, 2024. "Quantifying the impact of interest rate volatility on Asian energy companies: A comparative study of fossil and renewable sectors," Energy Economics, Elsevier, vol. 133(C).
    4. Mario González & Raúl Tadle, 2018. "Monetary Policy Effects on the Chilean Stock Market: An Automated Content Approach," Working Papers Central Bank of Chile 817, Central Bank of Chile.

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    More about this item

    Keywords

    Monetary policy; communication; interest rates; Chile; Central Bank;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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