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Monetary policy communication under inflation targeting: Do words speak louder than actions?

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  • Selva Demiralp

    ()
    (Koc University)

  • Hakan Kara

    ()
    (Central Bank of Turkey Research and Monetary Policy Department)

  • Pýnar Özlü

    ()
    (Central Bank of Turkey Research and Monetary Policy Department)

Abstract

This paper assesses the effectiveness of monetary policy communication of the Central Bank of Turkey (CBT) by quantifying the information content of the policy statements released right after the monthly Monetary Policy Committee meetings. First, we quantify the signal regarding the next interest rate decision and ask whether CBT’s words match its deeds, i.e., whether communication improves predictability using the Autoregressive Conditional Hazard model. Our findings suggest that the role of statements in predicting the next policy move have strengthened following the adoption of full-fledged inflation targeting (IT) regime. Second, we identify the surprise component of policy communication directly from market commentaries and assess its impact on the term structure of interest rates. We find that the response of the yield curve to policy statements have become highly significant for the unanticipated changes in the monetary policy communication and the relative importance of communication in driving market yields has increased through time.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1128.pdf
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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1128.

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Length: 46 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:koc:wpaper:1128

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Keywords: Central Bank Communication; Predictability; Transparency;

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  1. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
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  12. Rosa, Carlo, 2011. "The high-frequency response of exchange rates to monetary policy actions and statements," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 478-489, February.
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  19. Andersson, Malin & Dillen, Hans & Sellin, Peter, 2006. "Monetary policy signaling and movements in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1815-1855, November.
  20. Demiralp, Selva & Jorda, Oscar, 2004. "The Response of Term Rates to Fed Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 387-405, June.
  21. Fatum, Rasmus & Scholnick, Barry, 2008. "Monetary policy news and exchange rate responses: Do only surprises matter?," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1076-1086, June.
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