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Has the Clarity of Humphrey-Hawkins Testimonies Affected Volatility in Financial Markets?

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  • David-Jan Jansen

Abstract

By applying readability statistics to the Humphrey-Hawkins testimonies given by the Federal Reserve Chairman, I test whether the clarity of central bank communication affects volatility in financial markets. There are three key results. First, when clarity matters, the results are unequivocal: clarity diminishes volatility. Second, clarity of communication matters mostly for volatility of medium-term interest rates. Third, the effects of clarity vary over time. Clarity mattered especially, but not exclusively during Alan Greenspan's term at the Federal Reserve. Overall, the analysis shows the importance of transparent communication on monetary policy.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 185.

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Date of creation: Nov 2008
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Handle: RePEc:dnb:dnbwpp:185

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Keywords: central bank communication; transparency; readability; financial markets; volatility;

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  1. Diamond, Arthur M, Jr & Levy, David M, 1994. "The Metrics of Style: Adam Smith Teaches Efficient Rhetoric," Economic Inquiry, Western Economic Association International, vol. 32(1), pages 138-45, January.
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  3. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 509-541, 03.
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  7. Dubofsky, David A, 1991. " Volatility Increases Subsequent to NYSE and AMEX Stock Splits," Journal of Finance, American Finance Association, vol. 46(1), pages 421-31, March.
  8. Eijffinger, S.C.W. & Geraats, P., 2006. "How transparent are central banks?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-172467, Tilburg University.
  9. Ehrmann, Michael & Fratzscher, Marcel, 2007. "Social value of public information: testing the limits to transparency," Working Paper Series 0821, European Central Bank.
  10. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  11. Matthew C. Clayton & Jay C. Hartzell & Joshua Rosenberg, 2005. "The Impact of CEO Turnover on Equity Volatility," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1779-1808, September.
  12. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
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