The Dynamics of Investors’ Reactions to Informal Central Bank Communications

Abstract

Central bank informal communications became more frequent and acquired more mass media attention after the global financial crisis. Do investors react to the content (e.g., future expansionary or restrictive policy) of informal central bank communications? And especially, do investors have a memory of past “similar” speeches? Focusing on informal Central Bank communications in the United States, we show that speeches with an expansionary content positively influence cumulative abnormal stock returns. However, this effect is lower when there is more intense past informal communication with the same expansionary tone. This weakening effect is stronger when the previous expansionary speech is further back in time, suggesting a lack-of-confidence in the monetary policy’s effectiveness (skepticism hypothesis).