The Asset Price Channel of Monetary Policy: Evidence from Regional Stock-Market Developments in the Successor States of Former Yugoslavia

TL;DR

This study empirically examines the sector-specific asset price channel of monetary policy in the former Yugoslavian region, highlighting its presence in finance and telecom sectors but not in manufacturing or electricity.

Contribution

It constructs regional sectoral indices and employs panel VAR and Pooled Mean Group models to analyze the regional asset price response to monetary policy shocks.

Findings

Asset price channel exists in finance and telecom sectors.

No significant asset price response in manufacturing and electricity sectors.

Regional cooperation may enhance market efficiency.

Abstract

The aim of this study is to empirically investigate the existence of a sectoral asset price channel of monetary policy in the region of the six republics of former Yugoslavia. The study constructs sectoral indices for the entire region, building on the idea that one regional stock exchange may provide more efficiency for the listed companies in the region, while monetary policy relevance for it may be sector-specific. We employ panel vector autoregressive model to observe impulse responses of sectoral indices to innovations in monetary policy, while then disentangle the long- from the short-run relationships per index through a Pooled Mean Group estimation. Overall, we document presence of the asset price channel in the finance and telecom sectors, likely driven by the established multinational corporate networks fostering sub-market regionalization. Yet, this is not the case for the manufacturing and electricity sectors, which may imply that local stock markets are yet too fragmented and space for a more efficient regional stock market, either in the true sense of the word or, more realistically, though enhanced regional cooperation of the stock exchanges certainly exists.