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Does central bank communication really lead to better forecasts of policy decisions?

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Abstract

Nowadays, it is widely believed that greater disclosure and clarity over policy may lead to greater predictability of central bank actions. We examine whether communication by the European Central Bank (ECB) adds information compared to the information provided by a Taylor rule model in which real time expected inflation and output are used. We use five indicators of ECB communication that are all based on the ECB President's introductory statement at the press conference following an ECB policy meeting. Our results suggest that even though the indicators are sometimes quite different from one another, they add information that helps predict the next policy decision of the ECB. Furthermore, also when the interbank rate is included in our Taylor rule model, the ECB communication indicators remain significant.

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  • Jan-Egbert Sturm & Jakob de Haan, 2009. "Does central bank communication really lead to better forecasts of policy decisions?," KOF Working papers 09-236, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:09-236
    DOI: 10.3929/ethz-a-005888643
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    Cited by:

    1. Stanislav Hába, 2016. "Verbální intervence ČNB: reaguje devizový kurz na slova bankovní rady? [Czech National Bank Verbal Interventions: Does the Exchange Rate React to Words from CNB Bank Board?]," Politická ekonomie, Prague University of Economics and Business, vol. 2016(4), pages 405-419.
    2. Menno Middeldorp, 2011. "FOMC communication policy and the accuracy of Fed Funds futures," Staff Reports 491, Federal Reserve Bank of New York.
    3. Bulíř Aleš & Čihák Martin & Šmídkova Kateřina Š, 2013. "Writing Clearly: The ECB’s Monetary Policy Communication," German Economic Review, De Gruyter, vol. 14(1), pages 50-72, February.
    4. Menno Middeldorp, 2011. "Central bank transparency, the accuracy of professional forecasts, and interest rate volatility," Staff Reports 496, Federal Reserve Bank of New York.
    5. Bluhm, Marcel, 2011. "Investigating the monetary policy of central banks with assessment indicators," CFS Working Paper Series 2011/20, Center for Financial Studies (CFS).
    6. Sandra Schmidt & Dieter Nautz, 2012. "Central Bank Communication and the Perception of Monetary Policy by Financial Market Experts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(2‐3), pages 323-340, March.
    7. Blix Grimaldi, Marianna, 2011. "Up for count? Central bank words and financial stress," Working Paper Series 252, Sveriges Riksbank (Central Bank of Sweden).
    8. Bluhm, Marcel, 2015. "Investigating the monetary policy of central banks with assessment indicators," European Journal of Political Economy, Elsevier, vol. 38(C), pages 181-196.
    9. Donato Masciandaro & Davide Romelli, 2016. "From Silence to Voice: Monetary Policy, Central Bank Governance and Communication," BAFFI CAREFIN Working Papers 1627, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.

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    Keywords

    ECB; Central bank; Communication; Taylor rule;
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