The Financial Markets' Responses to Monetary Policy Announcements(Vol.9 No.1)
As expectations formed in financial markets have a considerable effect on price variables, monetary policy transmission through the expectations channel is becoming more important. This paper analyses the responses of financial variables - interest rates, stock prices, and exchange rates - to 138 announcements relating to the monetary policy stance made in Korea since May 1999 using structural VAR, exponential GARCH, and Ordered Probit models. Signals or announcements relating to monetary policy are shown to have enlarged the volatility of financial variables while not having any great effect on their actual level. Meanwhile, government pronouncements about monetary policy are interpreted as acting only as disruptive factors that reduce the effectiveness of the monetary policy authority's announcements and heighten market volatility without having any independent effect of their own on the financial markets. This paper suggests that by enhancing the transparency and independence of monetary policy it may be possible to fine-tune policy by signalling the monetary policy stance without actually adjusting the policy rate.