Public information arrival and investor reaction during a period of institutional change: An episode of early years of a newly independent central bank

•This study uses unique dataset from Reuters electronic brokerage platform for currency trading.•We investigate the reaction of FX market to the Polish central bank NBP announcements in 2000-2003.•NBP communication reduced the uncertainty, stabilized the market and increased trading activity.•We also found existence of possible wealth effects of the NBP central bank communication.

Employing unique data derived directly from the Reuters electronic brokerage platform for currency trading, this paper investigates the reaction of investors to central bank announcements on the foreign exchange market in Poland in the years 2000-2003. Our sample period captures a time during which the National Bank of Poland (NBP) gained independence and it was transforming institutionally and switching to a new monetary policy regime; namely inflation targeting. Evidence indicates that central bank communication helped reduce foreign exchange market uncertainty, measured by the conditional variance of foreign exchange returns, and increased trading volume. The findings suggest that in newly emerging economies with major institutional changes, investors may react significantly to central bank communication, and central banks can hence play an important role in market development during an institutional change. Our results also have broader implications for the applicability of micro-structure models in newly emerging economies.