Research Discussion Papers, Bank of Finland
No 22/1996:
From Policy Rate to Market Rates: An Empirical Analysis of Finnish Monetary Transmission
Peter Redward and Tuomas Saarenheimo ()
Abstract: In this paper we analyse the empirical relevance of the
mechanisms through which the Bank of Finland's actions are transmitted to
the Finnish economy. We concentrate on the first stage of the monetary
policy transmission mechanism; namely, the effect of the Bank's actions on
domestic market interest rates and the exchange rate. The questions we
analyse include: What is the impact of a change in the Bank of Finland's
one month tender rate on interest rates of longer maturities and on the
exchange rate? How do Finnish interest rates and the exchange rate react to
turmoil in foreign money and bond markets? To what extent can recent
developments in Finnish interest rates be attributed to the Bank of
Finland's policies? We find that the effect of a monetary policy shock is
limited to the short end of the yield curve. Changes in the Bank of
Finland's tender rate seem to signal the future path of short rates for a
period of 1 - 2 years. On the other hand, Finnish bond rates appear to
follow closely circumstances in the international financial market and do
not seem to react systematically to changes in the Bank of Finland's tender
rate. We find that monetary policy has contributed little to the large
swings in Finnish bond rates experienced over the last few years. Most of
the variation in bond rates can be attributed to changes in international
long rates and changes in the perceived overall credibility of the Finnish
economy.
Keywords: monetary policy transmission; VAR models; Finland; (follow links to similar papers)
33 pages, September 26, 1996
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