Monetary policy transmission in vector autoregressions: A new approach using central bank communication

The financial crisis which began in the U.S. in 2007 influenced all economies on a global scale following the collapse of Lehman Brothers in September 2008. As a response to the crisis, central banks started to implement non-standard monetary policy tools as well as short-term interest rates also known as standard policy tools in order to help monetary policy transmission channels work effectively. The European Central Bank (ECB) implemented non-standard monetary policies as in addition to the standard policy tools during this period. The non-standard monetary policies introduced by the ECB were different from those implemented by other central banks (Fed, Bank of England) in terms of implementation and results. Firstly, the policies of the ECB were not specific to one single country. Secondly, the banking system was the major source of finance in Europe, which had an impact on the policies. In this regard, the ECB introduced a policy of enhanced credit support consisting of five main elements in order to maintain price stability over the medium term following the crisis. By 2010, public debt in some member countries of the European Union reached high levels, requiring them to take additional measures. The Securities Markets Programme was introduced to that end. Initially focusing on the debt securities of Greece, Ireland, and Portugal, the Securities Markets Programme was expanded in August 2011 to cover the debt securities of Italy and Spain. In addition, two Long-term Refinancing Operations (LTROs) were introduced. This article presents a descriptive analysis of the non-standard monetary policy tools introduced by the ECB following the financial crisis. However, the monetary policy implemented in the Euro zone is not specific to one single country, and every country has a different financial structure, both of which limit the effectiveness of the policies implemented. The changing structure of the monetary policy implemented in the aftermath of the crisis aims to help the transmission channel work effectively. This depends on countries’ having a strong budget and financial structure as well as an effective monetary policy. Therefore, general economic factors may have complicated impacts on shaping the expected results of the policies when there are various implementations of monetary policies.

This dissertation explores how central bank communication influences financial markets, focusing on the transmission of information through policy statements, program announcements, and forward guidance. By combining event-study methodologies, yield curve modeling, and volatility analysis, the research investigates how financial market participants interpret and react to central bank messages in both the United States and the Euro area. The analysis covers bond yields, stock market volatility, and broader implications for monetary transmission under different policy environments. The first empirical study examines yield reactions to forward guidance in the United States. Using high-frequency data surrounding Federal Reserve announcements, it quantifies the immediate impact of forward-looking policy statements on Treasury yields across maturities. Employing an event-study framework and regression-based sensitivity analysis, the study finds that forward guidance substantially alters market expectations of the future policy rate path. Short- and medium-term maturities exhibit the strongest yield responses, indicating that communication about the timing and persistence of policy normalization is a critical driver of bond market pricing. The findings confirm that the tone, clarity, and credibility of central bank statements shape the effectiveness of forward guidance as a monetary policy tool. The second part extends the analysis to the Euro area, investigating yield reactions to European Central Bank (ECB) program announcements, such as the Securities Markets Programme (SMP), the Outright Monetary Transactions (OMT), and the Asset Purchase Programme (APP). Through a carefully constructed event dataset and multiple regression specifications, the study isolates announcement effects on sovereign yields across member states. Results show significant yield compression following announcements of unconventional policy programs, particularly in stressed sovereign markets. Panel regressions further reveal that countries with higher yield spreads experience stronger reactions, confirming the credibility and signaling effects of ECB interventions. Moreover, robustness checks confirm that program-specific and timing-related factors play a central role in determining the magnitude of market responses. The third empirical study investigates how ECB communication affects the entire yield curve. It develops a model linking communication tone, timing, and policy content to shifts in the level, slope, and curvature of the Euro area yield curve. The analysis demonstrates that clear and consistent communication reduces uncertainty in expectations and flattens the yield curve, signaling confidence in policy continuity. Conversely, ambiguous or surprise statements tend to steepen the curve and increase market volatility. These results emphasize the role of transparency and consistency in anchoring interest rate expectations, particularly in periods of unconventional monetary policy. The fourth study focuses on the effects of ECB announcements on stock market volatility. Utilizing multiple measures—high-frequency realized volatility, daily price ranges, future and implied volatility indices—the research examines how equity markets respond to policy communications over time. The results indicate that monetary policy announcements have statistically significant effects on volatility, especially during crisis and post-crisis periods. Positive announcements (e.g., expansionary or supportive policies) tend to reduce volatility, while negative or tightening-related communications heighten it. The study also explores asymmetric effects, persistence over subsequent days, and the weighting of announcement content, revealing that market sensitivity depends on both the perceived economic outlook and the credibility of policy measures. Across all four studies, the findings collectively underscore that central bank communication is a powerful instrument of monetary policy—capable of moving markets even in the absence of traditional rate changes. The magnitude and direction of financial market reactions depend on message clarity, policy credibility, and prevailing market conditions. The research highlights that well-calibrated communication enhances the predictability of monetary policy, stabilizes expectations, and reduces excess volatility. In contrast, ambiguity or inconsistency can amplify uncertainty and undermine transmission effectiveness. The dissertation contributes to the literature by providing a comprehensive cross-market and cross-institutional analysis of how communication serves as a vital, yet complex, channel of modern monetary policy in both normal and crisis periods.

Background and statement of the problem: Previous studies on Australian data provide inconclusive results on expectation hypothesis. Moreover, it is argued that Australian long-term rate is influenced by US long term rate, which signals decoupling of short rate from long rate. This decoupling, if true, makes monetary policy transmission ineffective. Accordingly, the paper examines expectation hypothesis with Australian data. Research methodology and data: Daily, weekly, monthly and quarterly data on 30-day, 90-day and 180-day dealers bill and 5-year and 10-year Australian government bond rate over the period from 1976 to 2016 are sourced from Datastream. Unit root test with structural break is applied to check the stationarity of data. Threshold co-integration approach is followed to test the expectation hypothesis of interest rate. Principal component analysis is used to identify common global factors affecting long rates in developed countries. Finally, Gewek’s instantaneous feedback method is applied to examine contemporaneous movement of long rate in developed countries. Research findings: Empirical analysis shows that all interest rate series are nonstationary at level; however, stationary at their first differences, which are suitable for co-integration analysis. Threshold co-integration results show that short rate and long rate in Australia are co-integrated, that is, expectation hypothesis holds. We also find evidence of threshold effect in some cases. Using principal component and instantaneous feedback method we find that long term bond yields in developed markets are driven by some unobserved global factors and the USA long rate has no causal influence on other developed markets’ long rate. We conclude that in Australia short rate is not de-coupling from long rate and hence effectiveness of monetary policy is well maintained. Policy implications: Expectation hypothesis is essential for the effective transmission of monetary policy. The hypothesis, if does not hold, causes interruption in monetary policy transmission. We find that expectation hypothesis holds for Australian data; hence RBA’s monetary policy transmission should not foresee any interruption. Moreover, bond contains premium for expected inflation, so it can be used as an indicator of RBA’s commitment for low inflation. Besides, financial intermediaries can effectively use the link between short and long rate in setting their interest on long-term loans based on short term interest rates.

All over the world, the role of central banks is being redefined following the outbreak of the global financial crisis and subsequent breakdown of the “great moderation” consensus. Consequently, most advanced economies adopted non-conventional approaches of monetary policy which resulted in spill-overs to emerging markets and developing countries with implications on their financial system and monetary policy transmission. This, coupled with, internal developments in the financial systems of developing countries necessitated modifications of not only monetary policy frameworks but also responsibilities of most central banks. This chapter acknowledges possible evolutions of the financial structure variables in developing countries and uses data from Kenya to analyze the dynamic linkages between financial sector variables and monetary policy transmission in the light of the financial crisis. The study used structural vector autoregression to examine the relationship between financial structure variables and monetary policy as well as assess the relative importance of various monetary transmission channels in Kenya. The results show that the changing financial structure represented by credit to the private sector and stock market indicators in Kenya only slightly altered relative importance of monetary policy transmission. The insignificance of credit to the private sector suggests that the importance attached to the bank lending channel in previous studies is waning while the marginal significance of the stock market indicator signals the potential for asset price channel. The results also indicate that the interest rate and exchange rate channels are relatively more important in Kenya while the asset prices is only marginally significant and bank lending channel is the weakest in the intermediate stage of monetary policy transmission. However, transmission of monetary policy to the ultimate objectives is somewhat slow and weak to inflation and almost absent to output. The result implies a limited role of monetary policy on growth and questions the wisdom of pursuing multiple objectives.

Central Bank Communication on Fiscal Policy

Structural Breaks and Regional Disparities in the Transmission of Monetary Policy

After the fall of Lehman Brothers in September 2008, the financial crisis turned into a global crisis and had a negative impact on the real economy. During the crisis, there has been a significant decrease in key macroeconomic indicators, such as GDP, short-term interest rates, unemployment and inflation. The GDP growth rate had taken a negative value in developed countries. Inflation was below 1 percent, and deflation was observed in Japan, which in turn slowed down economic development. Central banks responded to the crisis with a change in interest rates, but this was not enough to calm financial markets and improve the real economy. Most central banks have developed many new monetary policy tools, including communication strategies, credit policies, and large asset purchases. These new measures are often called “unconventional” monetary policies. The purpose of the article is to study quantitative easing as one of the unconventional measures of monetary policy. Methodology. The article uses general scientific and special methods: generalization, systematization, economic and statistical analysis, graphic and comparison methods. This allowed us to study the theoretical foundations of the quantitative easing policy, determine the economic background for these measures application, analyze the development stages and the basic rules of functioning policy. The quantitative easing policies usage was also examined on the examples of the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan. Results. The main trends and economic conditions, under which these methods can be used in future, were identified using an analysis of the quantitative easing application background. The policy’s main components analysis provides a clear understanding of the quantitative easing essence. As a result of the unconventional monetary policy usage, there has been a significant expansion of the USA, Japan and the Eurozone central banks' balances, which amounts to more than 10 trillion USD. Due to this process, central banks have become key bondholders. Practical meaning. The given results analysis will determine that kind of unconventional monetary policy effectiveness and the possible consequences of a significant increase in the central banks’ balance sheet assets. Value/originality. In the article, the conditions, under which unconventional monetary policy has been applied, are systematized and the four central banks’ quantitative easing policy is compared.

Many studies have been related to monetary policy transmission toward economic growth targets. However, research on monetary policy transmission by including bond yields as a channel has never been done in Indonesia. Therefore, this study will analyze the effectiveness of monetary policy transmission through bond yields compared to monetary policy transmission through asset price and exchange rate channels. This study uses secondary data obtained from the Central Bureau of Statistics (BPS), the Indonesia Stock Exchange (IDX), the Indonesian Economic and Financial Statistics (SEKI) of Bank Indonesia, and the website investing.com. The analysis technique used in this study is Vector Autoregression (VARs). Based on research results, a relatively effective monetary policy transmission channel is the stock asset price channel. It is because the variables in the channel of stock asset prices only take one month to respond permanently to monetary policy, but the contribution between variables is still low. In the bond yield and exchange rate channel, the response shown is only temporary, and the contribution between variables is still weak, so the two channels are ineffective in transmitting monetary policy with the target of economic growth in Indonesia.

This paper investigates how financial experts perceive the monetary policy of the European Central Bank (ECB). Assuming a Taylor‐rule‐type reaction function, we use qualitative survey expectations about future interest rates, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB’s interest rate rule. While perception of monetary policy regarding inflation has become more accurate since the ECB’s clarification of the monetary policy strategy in 2003, misperception regarding the ECB’s reaction to output has increased in the financial crisis.

How to quantitatively measure the macro dynamic effect of monetary policy is one of the most critical issues in the mainstream macro research （Benanke and Gertler, 1995; Christiano, et al., 1999）. In the context of global financial integration, how will a country’s monetary policy affect the macroeconomy of other countries? This international spillover effect of monetary policy has been hotly debated in the academy, but it has not yet been conclusive. The reason is that, empirically, how to identify the impact of exogenous monetary policy has not been well resolved at the technical level; theoretically, mainstream macroeconomic models provide various transmission mechanisms, and no consensus has been reached.Due to the above difficulties, research on the international spillover effect of monetary policy is still in its early stage, and the impact of US monetary policy on China’s economy is seldom studied. From the empirical point of view, this article follows the latest literature Barakchian and Crowe （2013, hereinafter referred to as BC） to identify the impact of exogenous monetary policy in the United States, and studies the dynamic impact of US monetary policy on China’s macroeconomy and its underlying transmission mechanism. This article provides new evidence on the international spillover effect of monetary policy and also tests the existing theories in international economics from an empirical perspective.The primary issue to be addressed in monetary policy research is how to identify exogenous monetary policy shocks. However, macroeconomic regulation often relies on the current situation of aggregate economy. Since there is a strong endogenous relationship among economic variables, it is difficult to directly construct a system that includes policy variables and macroeconomic indicators to identify exogenous monetary policy shocks. To this end, BC （2013） solves the endogenous issue regarding the identification of monetary policy shocks. The exogenous shock constructed through their indicator not only avoids making ad hoc assumptions about the feedback rules of monetary policy, but also avoids the endogenous problems and the sample selection issue in traditional identification methods.Based on the US monetary policy shock constructed by BC （2013）, this article studies the spillover effect of US monetary policy on China’s macroeconomy and therefore solves the aforementioned endogenous problem of monetary policy shocks. The basic model of the empirical analysis is a three-variable structural vector autoregressive error correction model （SVECM） that includes China’s industrial output, price index, and US monetary policy shocks. Based on this model, we find that the opening-up policy of WTO accession at the end of 2001 has a significant structural impact on the spillover effect of US monetary policy and its transmission mechanism. Specifically, we divide the monthly data from 1996−2008 into two sub-samples before and after January 2002. Using the 2002−2008 subsample, we find that the impact of the US’s tightening monetary policy significantly causes China’s output to rise and prices to fall, thus performing as a positive supply shock to China’s economy. Based on the 1996−2001 subsample, US monetary policy will not have a significant impact on China’s economy. The above findings are largely different from the findings in Kim （1999, 2001）, Canova （2005）, and among others.In the analysis of the transmission mechanism, this article finds that the price channel can well explain the stylized facts in the data. Our theory proceeds as follows: The US tightening monetary policy will lead to the appreciation of the US dollar, which will cause US manufacturers to lower their export prices in US dollars （Exchange Rate Pass-Through）. Due to the yuan-dollar fixed exchange rate system, China’s import prices will decline, and the prices of domestic raw materials and CPI will decline. Lower production costs lead manufacturers to increase production, which is reflected by an increase in China’s output. Therefore, the price channel indicates that the US tightening monetary policy is equivalent to a positive supply shock, which will simultaneously increase China’s output and reduce the price level. Based on the extended SVECM system, we find that Chinese macro data can identify the price channels of imported goods. Further robustness analysis shows that our main findings are robust to different sample periods and different model settings. Besides, in order to better explain the identification of import price channels, we have conducted empirical tests on several standard theories in international economics. The results show that the standard theories fail to explain the Chinese data. Therefore, the price channel provides the primary transmission mechanism of the spillover effect of US monetary policy on China’s economy, and this channel also explains the empirical finding that WTO has a structural impact on the spillover effect.

This paper focuses on China’s monetary policy in the context of financial crisis. Empirical Mode Decomposition (EMD) method is used to extract the influencing factors of M2 and analyze their effects. We construct a VAR model to calculate the effects of monetary policy in the context of financial crisis since September 2008, and compare with that in the Asian financial crisis. The results show that the expansionary monetary policies eliminate the negative effects of prior period monetary policies and influences of the financial crisis. These policies avoid a further decline in China's economy in time. The dramatically enhanced positive effects of monetary policy in the short-run may negatively impact economy by possible inflation expectations. The proposed subsequent monetary policy should be fine-tuned for inflation.

In this paper, we examine the effects of Czech monetary policy on the economy within the vector auto regression (VAR), structural VAR, Bayesian VAR with sign restrictions, and factor-augmented VAR, frameworks. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so. Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.

This study investigates whether the existence of high informality in Nigeria dampens effective transmission of monetary policy variation to retail rates. Using time series data from 1981-2018, the study adopts ARDL model to estimate both the long and short-run impacts of a high informal economy on the effectiveness of monetary policy. Findings reveal that changes in monetary policy rate has a significant positive impact on retail rates and that, without accounting for informality in the long-run, the transmission of monetary policy to commercial banks' average lending rate is about 95 percent. In addition, the study finds that, in the long-run, informality dampens the effectiveness of monetary policy in Nigeria through the interest rate channel by at least 72 percentage points. The authors, therefore, conclude that high presence of informality in Nigeria dampens the effectiveness of the monetary policy and that the size of the informal economy and commercial bank lending rate are positively related.

Monetary policy measures in reaction to the Global Financial Crisis and the COVID-19 pandemic have resulted in unprecedented (re)distributional effects. In addition, Central Bank (CB) interventions have been conceptualized as targeted measures favouring certain market participants compared to others. Against this background, discussions about CBs and inequality have sparked in the economic and legal literature. The article takes up this discourse and sheds light on the different aspects of equality within monetary policy: equality as an objective of monetary policy, equality and inequality considerations with regard to the design of monetary policy measures, and equality and inequality as side effects of monetary policy and the interaction between inequality and the monetary policy transmission. The aim is to provide a structural analysis of how the notion of equality is embedded in the mandate of the ECB and how it translates into legal requirements with regard to the implementation of monetary policy measures. Central Banks, inequality, ECB, monetary policy, global financial crisis, COVID-19

Recent events have highlighted the potential importance of nonlinear efiects of flscal variables (notably debt and deflcits) on interest rates: While in times when government solvency is not a concern the standard crowding-out efiects are of moderate magnitude, in times when default risk becomes an issue the interest rate efiects can become very large. This paper provides new evidence on the magnitude of these efiects. For the case when default risk is not a concern, it uses an arbitrage-free term structure model to estimate the dynamic efiects of flscal policy shocks on interest rates along the entire maturity spectrum. For the case when default risk becomes a concern (thereby violating a central assumption of the term structure model), I present evidence based on EMU government bond spread regressions on time-varying efiects of national flscal policies on spreads as well as the time-varying sensitivity of yield spreads to international risk aversion as a function of the state of flscal policy. JEL classiflcation: E6, H6.