Monetary policy under continuous market sentiment regimes
Monetary policy under continuous market sentiment regimes

Author(s): Michał Chojnowski
Subject(s): Economy, Business Economy / Management, Economic policy, Financial Markets
Published by: Wydawnictwo Uniwersytetu Ekonomicznego w Poznaniu
Keywords: economic sentiments;non-linear, vector autoregression;monetary policy;
Summary/Abstract: In this article, an econometric method is proposed for the analysis of monetary policy under regimes that include unobserved agents’ economic sentiments. In the non-linear LVSTAR model, market sentiments do not directly influence monetary policy, however, agents’ actions may change over the sentiments providing different reactions to economic shocks. The results indicate differences in the effectiveness of the monetary policy between the high and low economic sentiment regimes, while both countries react in a similar way to the sentiment. In general, during the low level of economic sentiment conducting monetary policy can become more challenging as the reaction time for the economy increases and the changes in monetary policy need to bemore vital to take effect.

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