The Impact of Monetary Policy Communication in an Emerging Economy: The Case of Indonesia

Monetary Policy Communication and Financial Markets in India

“…This paper finds that, based on the movement of asset prices, monetary policy surprises 2 have a statistically significant impact on both short-and long-term risk-free rates and corporate yields, but less so on equity prices and foreign exchange rates. These results are consistent with the findings in studies for other emerging markets, such as Chile (see Pescatori, 2018) and Indonesia (Ahokpossi et al, 2020). The results also confirm an improvement in the predictability of monetary policy during the FIT regime in India.…”

“…The monetary policy surprises, unanticipated changes in the policy rate, on average, have statistically significant impact on the government security and corporate yields, and no effect on the exchange rate and stock market. In their exercise for Indonesia in Ahokpossi et al (2020) show that the monetary policy surprises have significant impact on the money market rates but not on the bond yields, attributing this to a shallow financial market and incomplete yield curve. However, the findings here suggest that monetary policy surprises impact yields at all maturities are similar to Pescatori (2018), which examines the impact of unanticipated monetary policy changes in Chile.…”

“…Forward guidance from statements is found to shift the entire yield curve, while surprise actions tend to tilt the short end of the curve rather than shift the whole curve. Ahokpossi et al (2020) focus on the transparency, clarity, predictability, and impact of monetary policy communication on financial markets in Indonesia by examining two channels of communication-monetary policy press releases and reports. They find that monetary policy surprises have a significant impact on money market rates up to maturities of one month, but no significant impact on the bond market and the exchange rate.…”

“…Bloomberg conducts a survey of market analysts within the 24-hour window prior to the MPC meeting in which analysts report their anticipated policy rate from the forthcoming meeting. In this setting, the difference between the ex-post policy rate (realized after the MPC meeting) and analysts' anticipated rate constitute a policy surprise, which could be written as (Pescatori 2018;Ahokpossi et al 2020):…”