Spillovers of Monetary Policy Shocks on Financial Markets during the Crisis: Serbia and Euro Zone

The position of developing countries (DC) in the international financial system is the topic on which Dragoslav Avramović worked throughout his successful scientific career. This paper extends his research towards an empirical analysis of the importance of spillovers from the changes in the monetary policy of the European Central Bank (ECB) on the country risk premium and exchange rate in Serbia over the most intense phase of the Euro crisis (2008-2012). Empirical results suggest that the ECB policy changes during the crisis significantly spilled over to financial markets only in several dimensions. The policies did not have a statistically significant effect on the level of the exchange rate and of the risk premium. However, they had a significant effect on the rise in uncertainty, especially in the case of ECB’s foreign exchange liquidity and monetary stimulus measures. Our empirical results imply that the changes in monetary policy in advanced economies can drive uncertainty spillovers across the financial markets, thereby also affecting the business cycle fluctuations in emerging markets (EM). Keywords: Monetary policy, Financial markets, Uncertainty, Conditional quantiles. JEL: E44, E58, F31, F34.