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Communicational Bias in Monetary Policy: Can Words Forecast Deeds?

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  • Pablo Pincheira

    ()

  • Mauricio Calani

    ()

Abstract

Communication with the public is an ever-growing practice among central banks and complements their decisions of interest rate setting. In this paper we examine one feature of the communicational practice of the Central Bank of Chile which summarizes the assessment of the Board about the most likely future of monetary policy. We show that this assessment, which is called communicational bias or simply c-bias, contains valuable information regarding the future stance of monetary policy. We do this by comparing, against several benchmarks, the c-bias ability to correctly forecast the direction of monetary policy rates. Our results are consistent with the hypothesis that the Central Bank of Chile has (in our sample period) matched words and deeds. In fact, the c-bias is a more accurate predictor than two versions of random walks and than a uniformly-distributed random variable. It also outperforms, at some horizons, the predictive ability of a discrete Taylor-rule-type model that uses persistence, output gap and inflation-deviation-from-target as arguments. Furthermore, the c-bias is more accurate than survey-based forecasts at several forecasting horizons. We also show that the c-bias can provide information to improve monetary policy rate forecasts based on the forward rate curve.

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Bibliographic Info

Article provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal JOURNAL OF LACEA ECONOMIA.

Volume (Year): (2010)
Issue (Month): ()
Pages:

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Handle: RePEc:col:000425:008451

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Related research

Keywords: Monetary Policy; Predictive Ability; Discrete Taylor Rule; Communicational toolkit.;

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  1. Rosa, Carlo & Verga, Giovanni, 2007. "On the consistency and effectiveness of central bank communication: Evidence from the ECB," European Journal of Political Economy, Elsevier, vol. 23(1), pages 146-175, March.
  2. Refet Gürkaynak & Brian Sack & Eric Swanson, 2004. "Do actions speak louder than words? the response of asset prices to monetary policy actions and statements," Finance and Economics Discussion Series 2004-66, Board of Governors of the Federal Reserve System (U.S.).
  3. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04.
  4. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-45, December.
  5. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  6. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
  7. R. Fuentes S. & A. Jara R. & K. Schmidt-Hebbel D. & M. Tapia G., 2003. "Monetary Policy Nominalization in Chile: an Evaluation," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(2), pages 5-35, August.
  8. Anatoliy Belaygorod & Michael J. Dueker, 2005. "Discrete monetary policy changes and changing inflation targets in estimated dynamic stochastic general equilibrium models," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 719-34.
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