Analyzing the Impact of Monetary Policy on Financial Markets in Chile

Alicia Garcia-Herrero, Eric Girardin, Hermann Gonzalez


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.

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