Do Emerging Financial Markets React to Monetary Policy Announcements? The Case of Poland

Abstract

This paper provides evidence on the short-run reactions of an emerging financial market to monetary policy announcements. We employ an instrumental variable estimation approach based on the identification through heteroscedasticity technique to estimate the impact of nominal and unexpected official interest rate changes on asset prices in Poland. The new methodology controls for possible feedback relations between financial variables and the official interest rate changes. The measures of unexpected interest rate changes are extracted from the implied forward interest rates on the money market. In the analysis, the short-term interest rates respond significantly to the official interest changes, but neither the long-term interest rates, stock indices, nor foreign exchange rates react to monetary announcements in the expected direction. The unexpected monetary policy changes have stronger influence on the money market than the nominal changes in the official interest rate on the days of the monetary policy announcements.