Central Bank Communication Research Articles

The impact of macro news and central bank communication on emerging European forex markets

We employ a two-stage empirical strategy to analyze the impact of macroeconomic news and central bank communication on the exchange rates of three Central and Eastern European (CEE) currencies against the euro. First we estimate the nominal equilibrium exchange rate based on a monetary model. Second, we employ a high-frequency GARCH model to estimate the effects of the news and communication along with the estimated exchange rate misalignment on the exchange rate as well as its volatility. The analysis is performed during the pre-crisis (2004–2007) and crisis (2008–2009) periods. CEE currencies react to macroeconomic news during both periods in an intuitive manner that corresponds to exchange rate-related theories. However, the responsiveness of the currencies to central bank verbal interventions becomes important only during the crisis period.

Central Bank Communication on Financial Stability

Central banks regularly communicate about financial stability issues. This article asks how such communications affect financial markets, based on a unique dataset covering more than 1,000 releases of Financial Stability Reports (FSRs) and speeches by 37 central banks over the past 14 years. The findings suggest that optimistic FSRs lead to significant and potentially long-lasting positive abnormal stock market returns, whereas no such effect is found for pessimistic FSRs. Speeches and interviews, in contrast, have smaller effects on market returns during tranquil times but have been influential during the 2007–10 global financial crisis.

Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies

AbstractNowadays foreign exchange interventions occur in emerging market economies, whereas empirical studies on interventions mainly refer to advanced economies. However, interventions in emerging markets are different from those in advanced economies: they occur ‘regularly’ and central banks have considerable leverage, derived from relatively high reserves, some non‐sterilisation, the central bank’s information advantage and capital controls. Consequently, these interventions often successfully impact the level and volatility of exchange rates. Nevertheless, more research on interventions in emerging markets is needed analysing the influence of heterogeneous institutional circumstances, examining the role of central bank communication and using high‐frequency data.

Writing Clearly: The ECB’s Monetary Policy Communication

AbstractThe article presents a novel methodology for measuring the clarity of central bank communication using content analysis, illustrating the methodology with the case of the European Central Bank (ECB). The analysis identifies the ECB’s written communication as clear in about 85-95% of instances, which is comparable with, or better than, similar results available for other central banks. We also find that the additional information on risk to inflation and especially projection risk assessment contained in the ECB’s Monthly Bulletins helps to improve communication clarity compared to ECB’s press releases. In contrast, the bulletin’s communication on monetary developments has a negative, albeit small, impact on clarity.

Financial market reactions to announcements of monetary policy decisions

PurposeThe purpose of this paper is to make an analysis of the Brazilian experience after the adoption of inflation targeting concerning the effects caused by the new practices of transparency and communication in the monetary policy.Design/methodology/approachChanges in the financial market's expectations due to monetary policy actions are analyzed based on methodologies proposed by Cook and Hahn and Kuttner. Daily data from transactions in the interbank deposit futures market of the Securities, Commodities and Futures Exchange (BMF&BOVESPA) are used for the period July 1999‐January 2009. Two sub‐periods are also considered: the “maturation period” – the first phase of the effects caused by an increase in central bank transparency; and the “wisdom period” – the second phase in the financial market's perception regarding an environment with more transparency.FindingsThe findings are in consonance with the idea that an increase in central bank transparency and communication improves the efficiency of expectations hypothesis of the term structure of interest rate and the anticipation of changes in the interest rate target.Originality/valueThis study offers some new insights into how central bank communication improves the efficiency of the monetary policy for developing countries, which have adopted inflation targeting.

China's Monetary Policy Communication: Money Markets Not Only Listen, They Also Understand

Central bank communication is becoming a key aspect of monetary policy as a consequence of financial liberalization and the introduction of market instruments to conduct monetary policy. How much the market listens and, possibly, understands the People’s Bank of China (PBoC) should be a key question for the central bank in modernising its monetary policy toolkit. In this paper, we tackle this issue empirically and find that China’s money markets not only listen to the PBoC’s words but understand the tone of monetary policy which the PBoC intends to convey in its messages. First, we find that the volatility and volume of money market rates change right after communication from the PBoC’s governing body. Second, we find a statistically significant rise in interbank rates following communication with a hawkish tone. All in all, our results show strong evidence of effective oral and written communication by the PBoC aimed at China’s money markets.

Central bank communication on fiscal policy

The issue of central bank communication on fiscal policy has so far received very little attention in the literature. This article aims to shed light on the determinants of central bank communication on fiscal policy by analysing the intensity of central banks’ fiscal communication for five central banks (the Federal Reserve, the ECB, the Bank of Japan, the Bank of England and the Swedish Riksbank) over the period 1999–2011. The ECB communicates intensively on fiscal policies, in a normative way. The other central banks emphasise foreign fiscal developments, fiscal policy as input to forecasts, or the use of government debt instruments in monetary policy operations. The empirical analysis indicates that the financial crisis has overall increased the intensity of central bank communication on fiscal policy. The evolution of the government deficit ratio is a driver of the intensity of fiscal communication in the euro area, the US and Japan, and for Sweden since the start of the crisis, while in the UK its intensity is related to government debt developments as of the start of the crisis.

Interest Rate Expectations in the Media and Central Bank Communication

While there is ample evidence how central bank communication and interest rate decisions are perceived by financial markets, insights regarding the response of the public is lacking. Media is known to be an important transmitter of news to the public. Based on articles in the Financial Times Europe, we test how expectations on the future course of monetary policy presented in the media are affected by central bank communication and interest rate decisions.

The Impact of Macro News and Central Bank Communication on Emerging European Forex Markets

We employ a two-stage empirical strategy to analyze the impact of macroeconomic news and central bank communication on the exchange rates of three Central and Eastern European (CEE) currencies against the euro. First we estimate the nominal equilibrium exchange rate based on a monetary model. Second, we employ a high-frequency GARCH model to estimate the effects of the news and communication along with the estimated exchange rate misalignment on the exchange rate as well as its volatility. The analysis is performed during the pre-crisis (2004-2007) and crisis (2008-2009) periods. CEE currencies react to macroeconomic news during both periods in an intuitive manner that corresponds to exchange rate-related theories. However, the responsiveness of the currencies to central bank verbal interventions becomes important only during the crisis period.

Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication

Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts. We check whether their expectations are in line with the Phillips Curve, the Taylor Rule and the Income Fisher Equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation and the Taylor Rule, while 25% are in line with the Phillips Curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor Rule and the Phillips curve we observe a strong cyclical pattern. For all three concepts we find significant dierences across demographic groups. Evaluating determinants of consistency, we provide evidence that the likelihood of having theory-consistent expectations with respect to the Phillips curve and the Taylor rule falls during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is aected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, we show that consumers with theory-consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.

Central Bank Communication Affects the Term-Structure of Interest Rates

We empirically analyze how the Brazilian Central Bank (BCB) communication affects the term structure of future interest rates. Using principal components analysis, we construct a measure of the Monetary Policy Committee Minutes content that reflects policy makers optimism about the economic conditions. We call this measure the Optimism Factor (OF). When policy makers are more optimistic, reflected by increments in the OF, markets expectations respond and long-term future interest rates drop. Furthermore, when policy makers are pessimistic, reflected by a decrease in the OF, volatility on future interest rates increases. Our result indicates that policy maker communication has an effective impact on market expectations.

How Stale Central Bank Interest Rate Projections Affect Interest Rate Uncertainty

The Reserve Bank of New Zealand guides interest rate expectations of financial markets by projections of future short-term rates that are updated only once a quarter. As a consequence, projections become stale when time evolves and new information enters the market. This paper investigates the dynamic impact of probably outdated interest rate projections on the expectations management of central banks. Confirming the stabilizing effect of fresh central bank announcements, we show that interest rate uncertainty increases with the time elapsing since the recent interest rate projection. In contrast, we find that stale projections may hamper central bank communication. In fact, interest rate uncertainty increases when the market perceives the projections to be outdated.

Greenspan Shrugs: Central Bank Communication, Formal Pronouncements and Bond Market Volatility

This paper presents empirical evidence on one aspect of central bank communication policy – formal pronouncements by central bankers – to better understand whether this channel matters and, if so, the nature of the information being transmitted. We examine the relationship between three types of pronouncements from Chairman Alan Greenspan -- speeches, testimonies, and FOMC meetings (STF’s) -- and volatility in the 30-year U.S. Treasury bond futures market. Using high-frequency, intraday data proves important in uncovering the impacts of pronouncements on the bond market. Three questions relevant to central bank communication policy are addressed (see Figure 1 for a summary). We find that STF’s matter for bond market volatility, that this impact depends on the transmission of information (rather than just noise), and that this information reflects both substantive content and a coordinating signal. We further find that speeches only deliver content, that testimonies are largely a coordinating device, and that FOMC meetings play both roles. These findings of an important coordination channel document the relevance of the “global games” model of Morris and Shin and the “herding” model of Banerjee and the associated policy implication that pronouncements by the central bank may reduce welfare by overwhelming important private information.

The Response of Interest Rates to US and UK Quantitative Easing

We analyse declines in government bond yields following announcements by the Federal Reserve and the Bank of England of plans to buy longer term debt. Using dynamic term structure models, we decompose US and UK yields into expectations about future short‐term interest rates and term premiums. We find that declines in US yields mainly reflected lower expectations of future short‐term interest rates, while declines in UK yields appeared to reflect reduced term premiums. Thus, the relative importance of the signalling and portfolio balance channels of quantitative easing may depend on market institutional structures and central bank communication policies.

Can the Fed Talk the Hind Legs Off the Stock Market?

This paper analyzes the impact of US central bank communication on individual stock returns. We find a strong conditional effect of communication on stocks. The response of equities to central bank talk depends critically on the business cycle. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weaker and on average negative. The impact of central bank communication on stock prices displays similar cross-sectional variation as central bank actions. Cyclical industries are found to be more sensitive to central bank communication. In our sample of S&P 500 companies we find that the stock prices of firms with low cash ows, low returns to assets or equity, very high or low debt levels, small size or using more trade credit to be affected more by central bank communication. Our evidence suggests that central bank communication by the FOMC has an impact on stocks and provides additional evidence for the demand and the credit channel.

What Drives Clarity of Central Bank Communication About Inflation?

This paper examines whether the clarity of central bank communication about inflation varies with the economic environment. Using readability statistics and content analysis, we study the clarity of communication on the inflation outlook by seven central banks across three continents during the recent decade. We uncover significant and persistent differences in clarity over time and across countries. However, identifying determinants of clarity that are robustly relevant across our sample of central banks proves elusive. Overall, our findings suggest that a single model for clarity of central bank communication is not appropriate. Rather, when studying clarity of communication, country-specific and institution-specific factors are highly relevant.

Financial market reaction to central bank monetary policy communications under an inflation-targeting regime: the case of Brazil

Central bank communications are important for guiding expectations. For emerging countries, however, research on this issue is scarce. Because Brazil represents an important emerging country under inflation targeting, this paper studies the influence of monetary policy and central bank communications on the term structure of interest rates in Brazil. The study uses ordinary least squares (ols), generalized method of moments (gmm) and vector autoregresion (var) to examine the direction taken by interest rates when affected by central bank communications and monetary policy. The study finds evidence that because economic agents analyse the minutes of the Monetary Policy Committee meetings, monetary policy and central bank communications significantly influence the process of expectations formation for interest rates with different maturities in Brazil.

Central bank communication and correlation between financial markets: Canada and the United States

We study the correlation between pairs of bond and stock markets in Canada and the United States between January 1998 and December 2009 in the framework of diagonal-BEKK models. Our research question is whether monetary policy actions and communications by the Bank of Canada and the Federal Reserve significantly affect the conditional co-movement of financial markets (i) within Canada and (ii) between Canada and the United States. We find that central bank communication significantly increases the correlation of financial markets within and across the two countries and is particularly important for the correlation of Canadian and US long-term interest rates.

Communicating About Macro‐prudential Supervision – A New Challenge for Central Banks

AbstractIn response to the financial crisis of 2007–10, many central banks have been given responsibility for macroprudential supervision. This paper argues that central bank communication will play a central role for that purpose, and makes the point that it should be generally geared towards clarity, transparency and predictability, in order to enhance the effectiveness of macroprudential policies and ensure central bank accountability. Moreover, central banks must manage expectations by clearly communicating what macroprudential policy can achieve, and what its limitations are, to counteract reputational risks. This paper also provides empirical evidence showing that financial markets react significantly and systematically to central bank communication about financial stability issues. However, some forms of communication – such as through speeches – may at times raise volatility and uncertainty, in particular during crises, thus underlining the importance of choosing carefully a communication strategy on macroprudential policy which is suited for a given market environment.

The Response of Interest Rates to U.S. and U.K. Quantitative Easing

We analyze the declines in government bond yields that followed the announcements of plans by the Federal Reserve and the Bank of England to buy longer-term government debt. Using empirical dynamic term structure models, we decompose these declines into changes in expectations about future monetary policy and changes in term premiums. We find that declines in U.S. Treasury yields mainly reflected lower policy expectations, while declines in U.K. yields appeared to reflect reduced term premiums. Thus, the relative importance of the signaling and portfolio balance channels of quantitative easing may depend on market institutional structures and central bank communications policies.