Do central bank words matter in emerging markets? Evidence from Mexico☆

This paper analyzes the price and quantity effects of monetary policy statements in an emerging market economy. Surprises in monetary policy are identified using intraday data on asset prices around monetary policy announcements in Mexico. I find that asset prices and the portfolio flows of domestic and foreign investors respond strongly and persistently to both news about the policy rate and guidance about its future path communicated via statements. The ability to manage expectations about future policy via statements is thus not exclusive to central banks in advanced economies and does not require the zero lower bound to be binding.

Automated summary

This paper analyzes the effects of monetary policy statements on price and quantity in an emerging market economy. The study finds that asset prices and portfolio flows of investors, both domestic and foreign, respond significantly and persistently to news and guidance about policy rates.