The real effect of China's narrative Central Bank Communication

Unlike central banks in developed economies, the People's Bank of China (PBC) does not explicitly use forward guidance but rather provides explanatory information about monetary policy. The PBC has mainly used quarterly written reports and non-periodic oral channels to communication with the market, but there are significant differences in the institutional objectives and textual structures of these two types of communication. This paper investigates the real effects of the PBC's narrative on the macroeconomy. Our results show that the PBC's policy-related information can also guide inflation expectations and have a direct impact on the macroeconomy. The different macroeconomic effects between oral communication and written communication lies in their differences in timeliness, semantic complexity and ambiguity. Meanwhile, such explanatory communication can help the public understand policy stance, resist the negative impact of economic policy uncertainty, and thereby enhance monetary policy effectiveness. Finally, we find that oral communication has an increasingly significant impact on inflation expectations through variance decomposition.