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From policy rate to market rates : An empirical analysis of finnish monetary transmission

Listed author(s):
  • Redward, Peter
  • Saarenheimo, Tuomas
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    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. Key words: monetary policy transmission, VAR-models, Finland

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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 22/1996.

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    Date of creation: 1996
    Handle: RePEc:bof:bofrdp:1996_022
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    Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland

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    1. Armour, J. & Engert, W. & Fung, B.S.C., 1996. "Overnight Rate Innovations as a measure of monetary Policy Shocks in Vector Autoregressions," Staff Working Papers 96-4, Bank of Canada.
    2. Jordi Galí, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
    3. John F. Geweke & David E. Runkle, 1995. "A fine time for monetary policy?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 18-31.
    4. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
    5. Andersen, Kaare Guttorm & Kauko, Karlo, 1996. "A cross-country study of market-based housing finance," Research Discussion Papers 13/1997, Bank of Finland.
    6. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    7. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-1247, December.
    8. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    9. McCallum, Bennett T., 1983. "A reconsideration of Sims' evidence concerning monetarism," Economics Letters, Elsevier, vol. 13(2-3), pages 167-171.
    10. Vihriälä, Vesa, 1996. "Bank capital, capital regulation and lending," Research Discussion Papers 9/1996, Bank of Finland.
    11. Dale, Spencer & Haldane, Andrew G., 1995. "Interest rates and the channels of monetary transmission: Some sectoral estimates," European Economic Review, Elsevier, vol. 39(9), pages 1611-1626, December.
    12. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
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