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Central Bank Communication in the Financial Crisis: Evidence from a Survey of Financial Market Participants

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  • Bernd Hayo
  • Matthias Neuenkirch

Abstract

In this paper, we study whether central bank communication has a positive effect on market participants’ perception of central banks’ (i) credibility, (ii) unorthodox measures, and (iii) independence. We utilise a survey of more than 500 financial market participants from around the world who answered questions in reference to the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed). We find that market participants believe that the Fed communicates best, followed by the BoE, ECB, and BoJ. Similar rankings are found on the issues of credibility, satisfaction with unconventional monetary policy, and possible deterioration in independence. Using ordered probit models, we show that central bank communication has a positive effect on how central banks are perceived and understood, as it enhances credibility, increases satisfaction with unorthodox measures, and fosters perceived independence of central banks.

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File URL: http://www.uni-trier.de/fileadmin/fb4/prof/VWL/EWF/Research_Papers/2014-01.pdf
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Bibliographic Info

Paper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2014-01.

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Length: 30 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:trr:wpaper:201401

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Keywords: Central Bank; Communication; Credibility; Financial Crisis; Financial Market Participants; Independence; Survey; Unconventional Monetary Policy;

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References

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  1. Grüner, Hans Peter & Hayo, Bernd & Hefeker, Carsten, 2005. "Unions, wage setting and monetary policy uncertainty," Working Paper Series, European Central Bank 0490, European Central Bank.
  2. Demertzis, Maria & Andrew Hughes Hallett, 2003. "Central Bank Transparency in Theory and Practice," Royal Economic Society Annual Conference 2003, Royal Economic Society 56, Royal Economic Society.
  3. Bernd Hayo & Pierre-Guillaume Méon, 2013. "Behind closed doors: Revealing the ECB’s Decision Rule," Working Papers CEB, ULB -- Universite Libre de Bruxelles 13-025, ULB -- Universite Libre de Bruxelles.
  4. David-Jan Jansen & Jakob De Haan, 2009. "Has ECB communication been helpful in predicting interest rate decisions? An evaluation of the early years of the Economic and Monetary Union," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 41(16), pages 1995-2003.
  5. Hayo, Bernd & Neuenkirch, Matthias, 2010. "Do Federal Reserve communications help predict federal funds target rate decisions?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 32(4), pages 1014-1024, December.
  6. 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," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 46(4), pages 910-45, December.
  7. Matthias Neuenkirch, 2011. "Monetary Policy Transmission in Vector Autoregressions: A New Approach Using Central Bank Communication," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201143, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  8. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 54(5), pages 1099-1128, September.
  9. Menkhoff, L., 1998. "The noise trading approach -- questionnaire evidence from foreign exchange," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(3), pages 547-564, June.
  10. Bernd Hayo & Ummad Mazhar, 2011. "Monetary Policy Committee Transparency: Measurement,Determinants, and Economic Effects," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201140, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  11. Eijffinger, Sylvester C.W. & Geraats, Petra M., 2006. "How transparent are central banks?," European Journal of Political Economy, Elsevier, Elsevier, vol. 22(1), pages 1-21, March.
  12. Michael Woodford, 2005. "Central Bank Communication and Policy Effectiveness," NBER Working Papers 11898, National Bureau of Economic Research, Inc.
  13. Menkhoff, Lukas & Nikiforow, Marina, 2009. "Professionals' endorsement of behavioral finance: Does it impact their perception of markets and themselves?," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 71(2), pages 318-329, August.
  14. Oberlechner, Thomas & Hocking, Sam, 2004. "Information sources, news, and rumors in financial markets: Insights into the foreign exchange market," Journal of Economic Psychology, Elsevier, Elsevier, vol. 25(3), pages 407-424, June.
  15. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
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Cited by:
  1. Bernd Hayo & Matthias Neuenkirch, 2014. "Self-Monitoring or Reliance on Newswire Services: How Do Financial Market Participants Process Central Bank News?," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201423, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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