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Managing financial market expectations: The role of central bank transparency and central bank communication

  • Neuenkirch, Matthias

In this paper, we study the influence of central bank transparency and informal central bank communication on the formation of money market expectations. The sample covers nine major central banks from January 1999 to July 2007. We find, first, that transparency reduces the bias in money market expectations and dampens their variation. Second, informal communications help manage financial market expectations by reducing the variation of expectations. Third, various subcategories of the Eijffinger and Geraats (2006) transparency index lead to a smaller bias in expectations (in particular, evaluation of policy outcome and explanation of interest rate decisions) and to a reduction in the variation of expectations (in particular, explicit prioritization of objectives and provision of information on unanticipated macroeconomic disturbances).

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 28 (2012)
Issue (Month): 1 ()
Pages: 1-13

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Handle: RePEc:eee:poleco:v:28:y:2012:i:1:p:1-13
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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  1. 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," DNB Working Papers 170, Netherlands Central Bank, Research Department.
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  3. Eijffinger, S.C.W. & Geraats, P.M., 2004. "How Transparent Are Central Banks?," Cambridge Working Papers in Economics 0411, Faculty of Economics, University of Cambridge.
  4. Ellis Connolly & Marion Kohler, 2004. "News and Interest Rate Expectations: A Study of Six Central Banks," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  5. van der Cruijsen, Carin A.B. & Eijffinger, Sylvester C.W. & Hoogduin, Lex H., 2010. "Optimal central bank transparency," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1482-1507, December.
  6. Pierre L. Siklos, 2010. "Central Bank Transparency: Another Look," CAMA Working Papers 2010-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Peter Lildholdt & Anne Vila Wetherilt, 2004. "Anticipation of monetary policy in UK financial markets," Bank of England working papers 241, Bank of England.
  8. Bernd Hayo & hayo@wiwi.uni-marburg.de & Matthias Neuenkirch, 2011. "Canadian Interest Rate Setting: The Information Content of Canadian and U.S. Central Bank Communication," Southern Economic Journal, Southern Economic Association, vol. 78(1), pages 131-148, July.
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  10. Christopher W. Crowe & Ellen E. Meade, 2008. "Central Bank Independence and Transparency; Evolution and Effectiveness," IMF Working Papers 08/119, International Monetary Fund.
  11. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  12. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
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  14. de Haan, Jakob & Eijffinger, Sylvester C.W. & Rybinski, Krzysztof, 2007. "Central bank transparency and central bank communication: Editorial introduction," European Journal of Political Economy, Elsevier, vol. 23(1), pages 1-8, March.
  15. van der Cruijsen, Carin & Demertzis, Maria, 2007. "The impact of central bank transparency on inflation expectations," European Journal of Political Economy, Elsevier, vol. 23(1), pages 51-66, March.
  16. Geraats, P. & Eijffinger, S.C.W. & van der Cruijsen, C.A.B., 2006. "Does Central Bank Transparancy Reduce Interest Rates?," Discussion Paper 2006-11, Tilburg University, Center for Economic Research.
  17. 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.
  18. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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  22. Ranaldo, Angelo & Rossi, Enzo, 2010. "The reaction of asset markets to Swiss National Bank communication," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 486-503, April.
  23. Michael Ehrmann & Marcel Fratzscher, 2007. "Communication by Central Bank Committee Members: Different Strategies, Same Effectiveness?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 509-541, 03.
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  27. Matthew Rafferty & Marc Tomljanovich, 2002. "Central bank transparency and market efficiency: An econometric analysis," Journal of Economics and Finance, Springer, vol. 26(2), pages 150-161, June.
  28. Andersson, Magnus & Hofmann, Boris, 2009. "Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters," Working Paper Series 1098, European Central Bank.
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  31. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  32. Jonathan Coppel & Ellis Connolly, 2003. "What Do Financial Market Data Tell Us about Monetary Policy Transparency?," RBA Research Discussion Papers rdp2003-05, Reserve Bank of Australia.
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