IDEAS home Printed from https://ideas.repec.org/a/kap/pubcho/v157y2013i1p223-244.html

Dispersed communication by central bank committees and the predictability of monetary policy decisions

Author

Listed:
  • Michael Ehrmann

  • Marcel Fratzscher

Abstract

The paper asks whether members of central bank decision-making committees should communicate with the public in a collegial manner, by conveying the consensus or majority view of the committee, or in an individualistic way, by providing the diversity of views among the committee members. It finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly. This effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market’s prediction errors of FOMC policy decisions. Moreover, more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates. These findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Michael Ehrmann & Marcel Fratzscher, 2013. "Dispersed communication by central bank committees and the predictability of monetary policy decisions," Public Choice, Springer, vol. 157(1), pages 223-244, October.
    • Handle: RePEc:kap:pubcho:v:157:y:2013:i:1:p:223-244
    DOI: 10.1007/s11127-012-9941-0
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11127-012-9941-0
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11127-012-9941-0?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Timothy Besley & Neil Meads & Paolo Surico, 2008. "Insiders versus Outsiders in Monetary Policymaking," American Economic Review, American Economic Association, vol. 98(2), pages 218-223, May.
    2. Anne Sibert, 2003. "Monetary Policy Committees: Individual and Collective Reputations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(3), pages 649-665.
    3. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Simon Guttmann (ed.),The Future of Inflation Targeting, Reserve Bank of Australia.
    4. Jeffery D. Amato & Stephen Morris & Hyun Song Shin, 2002. "Communication and Monetary Policy," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 18(4), pages 495-503.
    5. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
    6. Gohlmann, Silja & Vaubel, Roland, 2007. "The educational and occupational background of central bankers and its effect on inflation: An empirical analysis," European Economic Review, Elsevier, vol. 51(4), pages 925-941, May.
    7. Petra Gerlach-Kristen, 2008. "The Role of the Chairman in Setting Monetary Policy: Individualistic vs. Autocratically Collegial MPCs," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 119-143, September.
    8. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 488, European Central Bank.
    9. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
    10. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    11. Clare Lombardelli & James Proudman & James Talbot, 2005. "Committees Versus Individuals: An Experimental Analysis of Monetary Policy Decision-Making," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    12. Chappell, Henry W, Jr & McGregor, Rob Roy & Vermilyea, Todd, 2004. "Majority Rule, Consensus Building, and the Power of the Chairman: Arthur Burns and the FOMC," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 407-422, June.
    13. Shughart, William F, II & Tollison, Robert D, 1983. "Preliminary Evidence on the Use of Inputs by the Federal Reserve System," American Economic Review, American Economic Association, vol. 73(3), pages 291-304, June.
    14. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    15. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September.
    16. Lars E. O. Svensson, 2006. "Social Value of Public Information: Comment: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con," American Economic Review, American Economic Association, vol. 96(1), pages 448-452, March.
    17. Michael Ehrmann & Marcel Fratzscher, 2009. "Purdah—On the Rationale for Central Bank Silence around Policy Meetings," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2‐3), pages 517-528, March.
    18. Blinder, Alan S & Morgan, John, 2005. "Are Two Heads Better than One? Monetary Policy by Committee," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 789-811, October.
    19. Allen, Stuart D & Bray, Jeremy & Seaks, Terry G, 1997. "A Multinomial Logit Analysis of the Influence of Policy Variables and Board Experience on FOMC Voting Behavior," Public Choice, Springer, vol. 92(1-2), pages 27-39, July.
    20. Alessandro Riboni & Francisco J. Ruge-Murcia, 2010. "Monetary Policy by Committee: Consensus, Chairman Dominance, or Simple Majority?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 363-416.
    21. Petra M. Geraats, 2007. "The Mystique of Central Bank Speak," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 37-80, March.
    22. Blinder, Alan S., 2007. "Monetary policy by committee: Why and how?," European Journal of Political Economy, Elsevier, vol. 23(1), pages 106-123, March.
    23. Toma, Mark, 1982. "Inflationary bias of the Federal Reserve System : A bureaucratic perspective," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 163-190.
    24. Michael Belongia, 2007. "Opaque rather than transparent: Why the public cannot monitor monetary policy," Public Choice, Springer, vol. 133(3), pages 259-267, December.
    25. Mihov, Ilian & Sibert, Anne, 2006. "Credibility and Flexibility with Independent Monetary Policy Committees," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 23-46, February.
    26. Cukierman, Alex & Wachtel, Paul, 1982. "Inflationary Expectations: Reply and Further Thoughts on Inflation Uncertainty," American Economic Review, American Economic Association, vol. 72(3), pages 508-512, June.
    27. Eijffinger, Sylvester C.W. & Geraats, Petra M., 2006. "How transparent are central banks?," European Journal of Political Economy, Elsevier, vol. 22(1), pages 1-21, March.
    28. Otmar Issing, 1999. "The Eurosystem: Transparent andAccountable or ‘Willem in Euroland’," Journal of Common Market Studies, Wiley Blackwell, vol. 37(3), pages 503-519, September.
    29. repec:dau:papers:123456789/7683 is not listed on IDEAS
    30. Spencer Dale & Athanasios Orphanides & Pär Österholm, 2011. "Imperfect Central Bank Communication: Information versus Distraction," International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 3-39, June.
    31. Stephen Morris & Hyun Song Shin & Hui Tong, 2006. "Social Value of Public Information: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con: Reply," American Economic Review, American Economic Association, vol. 96(1), pages 453-455, March.
    32. Henry W. Chappell, Jr. & Rob Roy McGregor & Todd A. Vermilyea, 2005. "Committee Decisions on Monetary Policy: Evidence from Historical Records of the Federal Open Market Committee," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033305, December.
    33. Carl E. Walsh, 2007. "Optimal Economic Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 5-36, March.
    34. Michael Ehrmann & Marcel Fratzscher, 2005. "Equal Size, Equal Role? Interest Rate Interdependence Between the Euro Area and the United States," Economic Journal, Royal Economic Society, vol. 115(506), pages 928-948, October.
    35. Faust, Jon & Svensson, Lars E O, 2001. "Transparency and Credibility: Monetary Policy with Unobservable Goals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 369-397, May.
    36. Petra Gerlach‐Kristen, 2004. "Is the MPC's Voting Record Informative about Future UK Monetary Policy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 299-313, June.
    37. 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.
    38. David-Jan Jansen & Jakob de Haan, 2006. "Look who's talking: ECB communication during the first years of EMU," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(3), pages 219-228.
    39. Mr. Mauro F Roca, 2010. "Transparency and Monetary Policy with Imperfect Common Knowledge," IMF Working Papers 2010/091, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ehrmann, Michael & Fratzscher, Marcel, 2007. "Social value of public information: testing the limits to transparency," Working Paper Series 821, European Central Bank.
    2. van der Cruijsen, C.A.B., 2008. "The economic impact of central bank transparency," Other publications TiSEM 86c1ba91-1952-45b4-adac-8, Tilburg University, School of Economics and Management.
    3. 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, March.
    4. 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, vol. 46(4), pages 910-945, December.
    5. 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, vol. 46(4), pages 910-945, December.
    6. Ehrmann, Michael & Fratzscher, Marcel, 2007. "The timing of central bank communication," European Journal of Political Economy, Elsevier, vol. 23(1), pages 124-145, March.
    7. Ehrmann, Michael & Fratzscher, Marcel, 2005. "How should central banks communicate?," Working Paper Series 557, European Central Bank.
    8. Donato Masciandaro & Oana Peia & Davide Romelli, 2024. "Central bank communication and social media: From silence to Twitter," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 365-388, April.
    9. Mikael Apel & Carl Andreas Claussen & Petra Gerlach-Kristen & Petra Lennartsdotter & Øistein Røisland, 2013. "Monetary policy decisions – comparing theory and “inside” information from MPC members," Working Paper 2013/03, Norges Bank.
    10. Ngomba Bodi, Francis Ghislain & Tadadjeu Wemba, Dessy-Karl & Soulemanou, Soulemanou, 2020. "Transparence des Banques Centrales et efficacité de la politique monétaire : quelles implications pour la Banque des Etats de l’Afrique Centrale ? [Central Bank's Transparency and effectiveness of monetary policy: what implications for the Bank of," MPRA Paper 116436, University Library of Munich, Germany.
    11. Rozkrut, Marek & Rybinski, Krzysztof & Sztaba, Lucyna & Szwaja, Radoslaw, 2007. "Quest for central bank communication: Does it pay to be "talkative"?," European Journal of Political Economy, Elsevier, vol. 23(1), pages 176-206, March.
    12. Ma, Yong & Li, Shushu, 2015. "Bayesian estimation of China's monetary policy transparency: A New Keynesian approach," Economic Modelling, Elsevier, vol. 45(C), pages 236-248.
    13. D. Masciandaro, 2019. "What Bird Is That? Central Banking And Monetary Policy In The Last Forty Years," BAFFI CAREFIN Working Papers 19127, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    14. Marek Rozkrut, 2008. "It’s not only WHAT is said, it’s also WHO the speaker is. Evaluating the effectiveness of central bank communication," NBP Working Papers 47, Narodowy Bank Polski.
    15. Jakob de Haan & David-Jan Jansen, 2009. "The communication policy of the European Central Bank: An overview of the first decade," DNB Working Papers 212, Netherlands Central Bank, Research Department.
    16. 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, vol. 46(4), pages 910-945, December.
    17. Eijffinger, Sylvester & van der Cruijsen, Carin, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers 6070, Centre for Economic Policy Research.
    18. Bernd Hayo & Ummad Mazhar, 2014. "Monetary Policy Committee Transparency: Measurement, Determinants, and Economic Effects," Open Economies Review, Springer, vol. 25(4), pages 739-770, September.
    19. Jung, Alexander & El-Shagi, Makram, 2015. "Has the publication of minutes helped markets to predict the monetary policy decisions of the Bank of England's MPC?," Working Paper Series 1808, European Central Bank.
    20. repec:pri:cepsud:161blinder is not listed on IDEAS
    21. El-Shagi, Makram & Jung, Alexander, 2015. "Have minutes helped markets to predict the MPC's monetary policy decisions?," European Journal of Political Economy, Elsevier, vol. 39(C), pages 222-234.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:pubcho:v:157:y:2013:i:1:p:223-244. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.