Communicational Bias In Monetary Policy: Can Words Forecast Deeds?
AbstractCommunication 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 (CBC) which summarizes the assessment of the Board about the most likely future of the monetary policy interest rate. We show that this assessment, known as 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’s ability to correctly forecast the direction of monetary policy rates. Our results indicate that the CBC has (in our sample period) matched words and deeds. The c-bias is a more accurate predictor of the future direction of monetary policy rates than a random walk and a uniformly-distributed random variable. It also improves the predictive ability of a discrete Taylor-Rule-type model that uses persistence, output gap and inflation-deviation-from-target as arguments. 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 InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 526.
Date of creation: Oct 2009
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Other versions of this item:
- Pablo Pincheira & Mauricio Calani, 2010. "Communicational Bias in Monetary Policy: Can Words Forecast Deeds?," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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