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Communicating Policy Options at the Zero Bound

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  • Lukas Burkhard
  • Andreas M. Fischer

Abstract

This paper examines a special episode in communication practices of the Swiss National Bank (SNB) when short-term interest rates reached the zero bound. A particular feature of SNB communication policy at the time was to talk openly about alternative policy instruments despite the fact that they were never implemented. Non-sterilized FX interventions were frequently mentioned as a potential instrument. We ask how did financial markets respond to the SNBs repeated references of non-sterilized interventions? The empirical results with high frequency data provide strong evidence that SNB intervention references depreciated the domestic currency for several hours. The case study supports the view that communication is an effective tool for monetary policy.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2007-12.

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Length: 43 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:snb:snbwpa:2007-12

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Keywords: Exchange Rate; Central Bank Communication; Zero Bound;

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References

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  1. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  2. Georg Rich, 2000. "Switzerland and the euro," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 28(3), pages 309-311, September.
  3. Rasmus Fatum & Michael Hutchison, 2002. "ECB Foreign Exchange Intervention and the EURO: Institutional Framework, News, and Intervention," Open Economies Review, Springer, Springer, vol. 13(4), pages 413-425, October.
  4. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
  5. Peiers, Bettina, 1997. " Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market," Journal of Finance, American Finance Association, American Finance Association, vol. 52(4), pages 1589-1614, September.
  6. Richard Payne & Paolo Vitale, 2002. "A transaction level study of the effects of central bank intervention on exchange rates," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 25040, London School of Economics and Political Science, LSE Library.
  7. Jansen, David-Jan & de Haan, Jakob, 2007. "Were verbal efforts to support the euro effective? A high-frequency analysis of ECB statements," European Journal of Political Economy, Elsevier, Elsevier, vol. 23(1), pages 245-259, March.
  8. Kathryn M. E. Dominguez & Freyan Panthaki, 2007. "The influence of actual and unrequited interventions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(2), pages 171-200.
  9. Jean-Marc Natal, 2004. "Deflation and Deflationary Traps: The Situation in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 127-170, March.
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  11. Takatoshi Ito, 2004. "Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?," NBER Working Papers 10818, National Bureau of Economic Research, Inc.
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  13. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(2), pages 343-361, March.
  14. Anderson, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers, University of Pennsylvania, Wharton School, Weiss Center 02-1, University of Pennsylvania, Wharton School, Weiss Center.
  15. Fischer, Andreas M., 2003. "Measurement error and the profitability of interventions: a closer look at SNB transactions data," Economics Letters, Elsevier, Elsevier, vol. 81(1), pages 137-142, October.
  16. repec:fip:fedgsq:y:2002:i:nov21 is not listed on IDEAS
  17. Fatum, Rasmus & Pedersen, Jesper, 2009. "Real-time effects of central bank intervention in the euro market," Journal of International Economics, Elsevier, Elsevier, vol. 78(1), pages 11-20, June.
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  20. Fischer, Andreas M & Zurlinden, Mathias, 1999. "Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(458), pages 662-76, October.
  21. Andreas M. Fischer, 2005. "On the Inadequacy of Newswire Reports for Empirical Research on Foreign Exchange Interventions," Working Papers, Swiss National Bank 2005-02, Swiss National Bank.
  22. Andreas M. Fischer, 2002. "Fluctuations in the Swiss Franc: What has Changed Since the Euro's Introduction?," Working Papers, Swiss National Bank, Study Center Gerzensee 02.03, Swiss National Bank, Study Center Gerzensee.
  23. Takatoshi Ito & Frederic S. Mishkin, 2004. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Working Papers 10878, National Bureau of Economic Research, Inc.
  24. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
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Citations

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Cited by:
  1. Büchel, Konstantin, 2013. "Do words matter? The impact of communication on the PIIGS' CDS and bond yield spreads during Europe's sovereign debt crisis," European Journal of Political Economy, Elsevier, Elsevier, vol. 32(C), pages 412-431.
  2. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," NBER Working Papers 13932, National Bureau of Economic Research, Inc.
  3. Kaufmann, Daniel & Bäurle, Gregor, 2013. "Exchange Rate and Price Dynamics at the Zero Lower Bound," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 79872, Verein für Socialpolitik / German Economic Association.

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