Emerging Market Central Banking and Communication: The Great Catchup

Abstract

Emerging market (EM) central banks have made remarkable progress in improving their policy frameworks and communication over the past two decades. Their transparency has improved dramatically; the readability of their statements has been better overall than in advanced economies; their focus on inflation has been sharper; several have proven to be better inflation-forecasters; and they have been more sparing in their use of “forward guidance”, which reduces data-dependence. All this has served them well in the post-Covid period of high inflation. EM central banks have recently outperformed central banks from the advanced economies in two critical respects: addressing and appropriately communicating post-Covid inflationary pressures in a timely manner, and avoiding banking sector stress during the monetary policy tightening cycle. EM central banks also started easing monetary policy from early/mid-2023, ahead of the Federal Reserve and ECB, although reducing inflation sustainably will be the ultimate test of their framework. This study demonstrates these points through the prism of central bank communication, using novel artificial intelligence (AI) methods. We conclude with policy lessons for both EM and advanced country central banks.