Abstract
Central banks, in both developed and developing economies, are responding to the increased demand for transparency in monetary policy formulation and implementation. It is argued that central bank communication enhances market efficiency and calms down market volatility. This paper investigates to what extent that the People Bank of China’s (PBC) communication influences the Chinese money market. Three communication indexes were constructed and used in the empirical analysis. The findings indicate that the PBC’s communication has a significant effect on the country’s money market. Secondly, informal communication appears to be more effective than formal communication. Overall, the results suggest that policy makers and market observers could pay much more attention to the informal communications, such as speeches of the bank’s officials, than formal ones, such as the bank’s report and minutes.
Highlights
Central banks’ transparency was not treated with importance until recently, and monetary policymaking was largely conducted with secrecy
As argued by Neuekirch (2011) and Knutter et al (2011) central bank communication is fundamental for emerging economies for the effective implementation of their monetary policy whose impact would be felt beyond their shores
The results suggest that the Peoples Bank of China’s (PBC) deeds tally with their words; where words indicating a change to contractionary or otherwise is followed by the respective actions
Summary
Central banks’ transparency was not treated with importance until recently, and monetary policymaking was largely conducted with secrecy. Wellcommunicated information makes markets become more efficient as it reduces uncertainty and lowers volatility and, helps central banks achieve part of its monetary policy objectives (Kahn 2007) This is because provision of accurate and credible information reduces asymmetric information by signalling the banks’ policies, economic outlook, etc. As argued by Neuekirch (2011) and Knutter et al (2011) central bank communication is fundamental for emerging economies for the effective implementation of their monetary policy whose impact would be felt beyond their shores. This is important when their output constitutes a significant proportion of the global output.
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