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Purdah: on the rationale for central bank silence around policy meetings

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  • Ehrmann, Michael
  • Fratzscher, Marcel

Abstract

Despite substantial differences in monetary policy and communication strategies, many central banks share the practice of purdah, a self-imposed guideline of abstaining from communication around policy meetings or other important events. This practice is remarkable, as it seems to contradict the virtue of transparency by requiring central banks to withhold information precisely when it is sought after intensely. However, imposing such a limit to communication has often been justified on grounds that such communication may create excessive market volatility and unnecessary speculation. This short paper assesses the purdah for the Federal Reserve. The empirical results confirm the conjecture that financial markets are substantially more sensitive to central bank communication around policy meetings. Short-term interest rates react three to four times more strongly to statements in the purdah before FOMC meetings than during other times, and market volatility increases (compared to a volatility reduction induced by statements otherwise). The findings thus offer relevant insights about the limits to central bank transparency. JEL Classification: E58, E52, E43

Suggested Citation

  • Ehrmann, Michael & Fratzscher, Marcel, 2008. "Purdah: on the rationale for central bank silence around policy meetings," Working Paper Series 868, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2008868
    Note: 203739
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    References listed on IDEAS

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    More about this item

    Keywords

    communication; effectiveness; Federal Reserve; interest rates; monetary policy; purdah; transparency;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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