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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 (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 Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 526.

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Date of creation: Oct 2009
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Handle: RePEc:chb:bcchwp:526

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  1. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  2. 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.
  3. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 9, pages 291-372 Central Bank of Chile.
  4. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
  5. 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.
  6. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2004. "Has Monetary Policy Become More Efficient? A Cross Country Analysis," NBER Working Papers 10973, National Bureau of Economic Research, Inc.
  7. 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.
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