Analyzing the Impact of Monetary Policy on Financial Markets in Chile

BBVA 16/14 Working Paper

20 Pages Posted: 20 Apr 2018 Last revised: 7 Jun 2018

See all articles by Alicia García-Herrero

Alicia García-Herrero

Natixis ; BBVA Research; Bruegel

Eric Girardin

University Aix-Marseille 2 - GREQAM

Hermann Gonzalez

Grupo Banco Bilbao Vizcaya Argentaria (BBVA)

Date Written: May 1, 2015

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 generate 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 lower relevance of Central Bank 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.

Keywords: Monetary Policy, Communication, Interest Rates, Chile, Central Bank

JEL Classification: E52, E58, E43

Suggested Citation

Garcia-Herrero, Alicia and Girardin, Eric and Gonzalez, Hermann, Analyzing the Impact of Monetary Policy on Financial Markets in Chile (May 1, 2015). BBVA 16/14 Working Paper . Available at SSRN: https://ssrn.com/abstract=3154906

BBVA Research ( email )

C/ Azul,4. Edificio La Vela. Planta 4
Madrid, 28050
Spain

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

Eric Girardin

University Aix-Marseille 2 - GREQAM ( email )

Centre de la Vieille Charité
Marseille, 13 002
France

Hermann Gonzalez

Grupo Banco Bilbao Vizcaya Argentaria (BBVA) ( email )

Paseo de Recoletos, 10
Madrid
United States

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