Central Bank Communication Research Articles

Signalling vs. Cost-of-Fund Effects of Monetary Policy in Nigeria: Evidence from the Post-Banking Sector Consolidation Data

The communique of the meeting of the Monetary Policy Committee provides two separate sets of information to the financial market, each of which can have separate effects on the overall policy outcome. First, it contains information on the policy decision, typically in the form of a change in the Monetary Policy Rate (MPR). This change in the MPR affects other rates in the market because it represents a change in the cost of funds to the banks. This is the so-called cost-of-funds effect of monetary policy. Secondly, the communique also typically contain some information that signal the future direction of monetary policy. These signals are likely to affect the market expectations, and therefore affect the term-structure of interest rates. This is the signalling effect of monetary policy. This paper uses daily data for the period 2009-2011 to estimate the separate effects of monetary policy signals and cost of funds on the interbank call rate and open buy-back rate. We found that the cost-of-money effect on the Open Buy Back rate is larger than it is on the call rate. The effect of monetary policy signals on both rates is however found to be quite significant. This, we argue, suggests that central bank communications is potentially a viable tool of monetary policy design and implementation in Nigeria. The paper therefore suggests that the CBN should be proactive in designing an optimal communication strategy.

Macroeconomic announcements, communication and order flow on the Hungarian foreign exchange market

We investigate the relationship between intradaily HUF/EUR exchange rate on the one hand and news announcements and order flow on the other hand. We extend the existing literature on foreign exchange market microstructure by considering a small open transition economy. We find that the intradaily exchange rate depends on both news announcements and order flow. We conclude that news on the HUF/EUR market are transmitted directly via immediate reactions to news announcements as well as indirectly via order flow. We decompose the total effect of news on exchange rate and find that order flow accounts for approximately three quarters, compared with one quarter for direct news impact. Although the HUF is pegged to the EUR, the exchange rate shows similar characteristics as reported in the literature for major currencies. It does, however, differ in quantitative terms: the importance of indirect news transmission is remarkably higher on the HUF/EUR market. Furthermore, we extend the commonly used set of news by communication of central bankers and significantly improve the explanatory power of the estimates. Thus, central bank communication can be regarded as an important determinant for the HUF/EUR rate. Copyright © 2010 John Wiley & Sons, Ltd.

Communication Matters: U.S. Monetary Policy and Commodity Price Volatility

Using a GARCH model, we analyze the influence of U.S. monetary policy action and communication on the price volatility of commodities for the period 1998–2009. We find, first, that U.S. monetary policy events have an economically significant impact on price volatility. Second, expected target rate changes and communications decrease volatility, whereas target rate surprises and unorthodox monetary policy measures increase it. Third, we find a change in reaction to central bank communication during the recent financial crisis: the “calming” effect of communication found for the whole sample is partly offset during that period.

Communication of Central Bank Thinking and Inflation Dynamics

This paper studies the role of central bank communication of its economic assessment in shaping inflation dynamics. Imperfect information about the central bank's assessment - or the basis for monetary policy decisions - could complicate the private sector's learning about its policy response function. We show how clear central bank communication, which facilitates agents' understanding of policy reasoning, could bring about less volatile inflation and interest rate dynamics, and afford the authorities with greater policy flexibility. We then estimate a simple monetary model to fit the Mexican economy, and use the suggested paramters to illustrate the model's quantitative implications in scenarios where the timing, nature and persistence of shocks are uncertain.

Communication of Central Bank Thinking and Inflation Dynamics

This paper studies the role of central bank communication of its economic assessment in shaping inflation dynamics. Imperfect information about the central bank’s assessment - or the basis for monetary policy decisions - could complicate the private sector’s learning about its policy response function. We show how clear central bank communication, which facilitates agents’ understanding of policy reasoning, could bring about less volatile inflation and interest rate dynamics, and afford the authorities with greater policy flexibility. We then estimate a simple monetary model to fit the Mexican economy, and use the suggested paramters to illustrate the model’s quantitative implications in scenarios where the timing, nature and persistence of shocks are uncertain.

Central Bank Communication and the Perception of Monetary Policy by Financial Market Experts

This paper investigates how financial market experts perceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of individual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's interest rate rule. While the perception of monetary policy regarding inflation has become more accurate since the clarification of the ECB's monetary policy strategy in May 2003, the experts' misperception regarding the ECB's reaction to output has increased in the financial crisis.

Central Bank Communication on Financial Stability

Central banks regularly communicate about financial stability issues, by publishing Financial Stability Reports (FSRs) and through speeches and interviews. The paper asks how such communications affect financial markets. Building a unique dataset, it provides an empirical assessment of the reactions of stock markets to more than 1000 releases of FSRs and speeches by 37 central banks over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and do not generate a volatility reduction during tranquil times, but have had a substantial effect during the 2007-10 financial crisis. The findings suggest that financial stability communication by central banks are perceived by markets to contain relevant information, and they underline the importance of differentiating between communication tools, their content and the environment in which they are employed.

Central Bank Communication on Financial Stability

Central Bank Communication on Financial Stability

Up for Count? Central Bank Words and Financial Stress

While knowing there is a financial distress 'when you see it' might be true, it is not particularly helpful. Indeed, central banks have an interest in understanding more systematically how their communication affects the markets, not least in order to avoid unnecessary volatility; the markets for their part have an interest in better deciphering the message of central banks, especially of course with regard to the conduct of future monetary policy. In this paper we use a novel approach rooted in textual analysis to begin to address these issues. Building on previous work from textual analysis, we are able to use quantitative methods to help identify and measure financial stress. We apply the techniques to the European Central Bank's Monthly Bulletin and show that the results give a much more complete and nuanced picture of market distress than those based only on market data and may help improve how the Central Bank's communication is designed and understood.

Cycles, Gaps, and the Social Value of Information

What are the welfare effects of the information contained in macroeconomic statistics, central-bank communications, or news in the media? We address this question in a business-cycle framework that nests the neoclassical core of modern DSGE models. Earlier lessons that were based on beauty contests (Morris and Shin, 2002) are found to be inapplicable. Instead, the social value of information is shown to hinge on essentially the same conditions as the optimality of stabilization policies. More precise information is unambiguously welfare-improving as long as the business cycle is driven primarily by technology and preference shocks--but can be detrimental when shocks to markups and wedges cause sufficient volatility in output gaps. A numerical exploration suggests that the first scenario is more plausible.

DOMESTIC OR U.S. NEWS: WHAT DRIVES CANADIAN FINANCIAL MARKETS?

Using a generalized autoregressive conditional heteroscedasticity (GARCH) model, we study the effects of Canadian and U.S. central bank communication and macroeconomic news on Canadian bond, stock, and foreign exchange market returns and volatility. First, Canadian central bank communication is more relevant than its U.S. counterpart, whereas in the case of macro news, that originating from the United States dominates. Second, we find evidence that the impact of Canadian news reaches its maximum when the Canadian target rate departs from the U.S. target rate (2002–2004) and thereafter. The introduction of fixed announcement dates initially does not cause a noticeable break in the data. (JEL E52, G14, G15)

DOES THE CLARITY OF CENTRAL BANK COMMUNICATION AFFECT VOLATILITY IN FINANCIAL MARKETS? EVIDENCE FROM HUMPHREY-HAWKINS TESTIMONIES

I. INTRODUCTION This article investigates whether greater clarity of central bank coincides with lower levels of volatility in financial Recent empirical work has established that central bank talk is often an important source of information for the private sector. Surveying the literature, Blinder et al. (2008) conclude that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets. Still, it is not clear what would constitute an optimal strategy. In practice, large differences exist in the way in which central banks communicate. Some central banks, such as the Federal Reserve and the Bank of England, publish detailed minutes of their monetary policy meetings, whereas others, such as the European Central Bank, do not. At the same time, the European Central Bank is one of the few central banks holding an elaborate press conference shortly after the interest rate decision. Finally, some central banks, such as the Reserve Bank of New Zealand and Norges Bank, publish forecasts of their own policy rate, whereas most monetary authorities refrain from doing so. Alongside the issue of optimal communication, there has been a long-standing debate on central bank A greater degree of transparency may have important benefits, such as well-anchored inflation expectations. At the same time, various authors have suggested that limits to transparency may exist (Cukierman and Meltzer 1986, Morris and Shin 2002). Whether transparency is and to what extent, is in the end an empirical matter. evidence in favor of transparency has accumulated over the years. Although Geraats (2002) cautiously concluded that the available evidence suggests that transparency tends to be beneficial, more recently, van der Cruijsen and Eijffinger (2007) find that The empirical results are largely in favor of more transparency. Many studies in the literature use measures of institutional transparency, such as whether the central bank publishes macroeconomic forecasts or information on its policy deliberations. So far, the clarity of actual central bank communications has received little attention. (1) Still, if the central bank communicates regularly, but does so in a nonaccessible manner, it can hardly be called transparent. Moreover, the relationship between clarity and volatility seems intuitive: when central bankers communicate clearly, financial markets have less difficulty in interpreting the central bank's message. This leads to less uncertainty, which is reflected in lower levels of volatility. Therefore, this article contributes to the literature by focusing on the effects of clarity of communication. For a broad range of financial instruments, it is tested whether clarity of affects volatility. Two readability statistics are used--the Flesch reading ease score and the Flesch-Kincaid grade level--to measure the clarity of central bank communication. Both statistics have been widely applied in other fields. (2) One benefit of these two criteria is their objectivity: they are completely based on the characteristics of the underlying texts. Readability statistics are applied to the testimony by the Chairman of the Federal Reserve at Congressional Monetary Policy Oversight hearings--more commonly known as the Humphrey-Hawkins hearings. For almost 30 years these testimonies have been one of the main channels of the Federal Reserve. This article has three key results. First, when clarity matters, the results point to the conclusion that clarity diminishes volatility. Second, clarity of matters mostly for volatility of medium-term interest rates. Third, the effects of clarity vary over time. There is an indication that clarity has especially mattered during Alan Greenspan's term at the Federal Reserve. Overall, the analysis shows the importance of transparent on monetary policy. …

THE IMPACT OF ECB MONETARY POLICY DECISIONS AND COMMUNICATION ON THE YIELD CURVE

We use intraday changes in money market rates to construct indicators of news about monetary policy stemming separately from policy decisions and from official communication of the European Central Bank, and study their impact on the yield curve. We show that communication may lead to substantial revisions in expectations of monetary policy and, at the same time, exert a significant impact on interest rates at longer maturities. Thereby, the maturity response pattern to communication is hump-shaped, whereas that to policy decisions is downward-sloping. (JEL: E43, E58)

Does central bank communication really lead to better forecasts of policy decisions? New evidence based on a Taylor rule model for the ECB

Nowadays, it is widely believed that greater disclosure and clarity over policy may lead to greater predictability of central bank actions. We examine whether communication by the European Central Bank (ECB) adds information compared to the information provided by a Taylor rule model in which real-time expected inflation and output growth are used. We use five indicators of ECB communication that are all based on the ECB President’s introductory statement at the press conference following an ECB policy meeting. Our results suggest that even though the indicators are sometimes quite different from one another, they add information that helps predict the next policy decision of the ECB. Furthermore, also when the interbank rate is included in our Taylor rule model, the ECB communication indicators remain significant.

Managing Financial Market Expectations: The Role of Central Bank Transparency and Central Bank Communication

In this paper, we study the influence of central bank transparency and informal central bank communication on the formation of money market expectations. The sample covers nine major central banks from January 1999 to July 2007. We find, first, that transparency reduces the bias in money market expectations and dampens their variation. Second, informal communications help manage financial market expectations by reducing the variation of expectations. Third, various subcategories of the Eijffinger and Geraats (2006) transparency index lead to a smaller bias in expectations (in particular, evaluation of policy outcome and explanation of interest rate decisions) and to a reduction in the variation of expectations (in particular, explicit prioritization of objectives and provision of information on unanticipated macroeconomic disturbances).

THE ASYMMETRIC IMPACT OF “INFORMATIVE” AND “UNINFORMATIVE” FEDERAL OPEN MARKET COMMITTEE STATEMENTS ON ASSET PRICES

I. INTRODUCTION Over the past decade, the policy statements issued by the Federal Open Market Committee (FOMC) after each meeting have become an increasingly important element of monetary policy-making in the United States. These statements provide about the Fed's view on economic outlook, key forces that are likely to shape future developments and potential implications for monetary policy. Therefore, on policy announcement days, market participants monitor closely not only what the Fed does (interest rate decisions), but also what it says (FOMC statements). One striking example is the policy announcement of January 28, 2004, when the Fed kept its target rate unchanged (a move that was widely anticipated by the market), but unexpectedly altered the wording of the statement, causing one of the largest reactions on record in financial markets. Theoretically, central bank communication should not matter to market participants if the central bank is committed to an unchanged policy rule and the public has a perfect understanding of the rule, the objectives, and the thinking of the monetary authority. In reality, the central bank cannot possibly commit to an inflexible policy rule given that the number of contingent states is infinite (Blinder et al. 2008). Consequently, the public needs to estimate the policy function and because the central bank invariably knows more about its future moves, the dissemination of this is important to market participants. It appears that, at least in practice, market participants should pay attention to the content of FOMC statements. However, more does not always translate to greater clarity and ill-conceived statements confuse rather than enlighten. Kahneman (2003) argues that there are limits to how much can be digested effectively and more may reduce common understanding among market participants. Moreover, central bank communication may be welfare reducing if agents place too much weight on policy statements and too little on their own information, thus crowding-out private beliefs which are an important source of for the Fed (Amato, Morris, and Shin 2002; Morris and Shin 2002). In addition, the Fed may increase noise if it communicates on which it has imprecise knowledge--such as on future economic developments rather than the policy path. This paper contributes to a young but rapidly growing literature on central bank communication by evaluating the impact of the content of FOMC statements on the level and volatility of Treasuries and stock returns. To measure the information content, we assess the consensus view about the importance of the statements by collecting stories from three major sources right after a policy meeting. This allows us to group statements into two broad categories, and uninfor-mative, with informative statements delivering important which was not previously anticipated by the consensus. A priori, we expect asset prices to respond asymmetrically to the type of information, with informative statements generating a larger response. Figure 1 seems to confirm this idea: the chart plots changes in S&P 500 and Treasury yields around policy announcements with solid bars representing dates when the statement was informative. As seen, the largest asset price changes typically occur when a statement releases important information, which indicates that markets do react to the content. One reason for this oversized response is that the delivered by these statements creates news in the sense that the content is both important and unexpected. If the relates to future monetary policy, about which the Fed is expected to possess superior knowledge, then it should have a considerable impact on asset prices. However, statements routinely transmit the Fed's economic outlook which may be interpreted as an additional policy signal because this outlook presumably shapes the future course of monetary actions. …

Bank of Canada Communication, Media Coverage, and Financial Market Reactions

In the literature, central bank communication is identified via either (i) the written content of original communications or (ii) newswire reports. We examine how (i) Bank of Canada communications and (ii) media reporting on them impacts Canadian bond and stock market returns using a GARCH model over the period 1998–2006. Official communications exert a relatively larger influence on the bond market, whereas media coverage is more relevant for the stock market. In general, media filtering does not appear to play a prominent role.

The impact of U.S. central bank communication on European and pacific equity markets

We examine the effects of U.S. target rate changes and FOMC communications on European and Pacific equity market returns and find that both have a significant impact. European markets are influenced by a greater variety of communications than Pacific markets.

Central bank communication and exchange rate volatility: a GARCH analysis

We examine the effects of the Czech National Bank communication, macroeconomic news and interest rate differential on exchange rate volatility using generalized autoregressive conditional heteroscedasticity model. Our results suggest that central bank communication has a calming effect on exchange rate volatility. The timing of central bank communication seems to matter, too, as financial markets respond more to the communication before the policy meetings than after them. Next, macroeconomic news releases are found to reduce exchange rate volatility, while interest rate differential seems to increase it.

Central Bank Communication and the Liquidity Trap

Central bank communication plays an important role in shaping market participants' expectations. This paper studies a simple nonlinear model of monetary policy where agents have incomplete information about the economic environment. It shows that agents' learning and the dynamics of the economy are heavily affected by central bank's transparency about its policy rule. A monetary authority that does not communicate its rule can induce “learning equilibria” where the economy experiences prolonged periods of deflation and slow growth. More generally, small expectational errors can result in complex economic dynamics, inducing welfare‐reducing fluctuations. On the contrary, central bank communication helps stabilizing expectations around the inflation target equilibrium.