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Purdah-On the Rationale for Central Bank Silence around Policy Meetings

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  • MICHAEL EHRMANN
  • MARCEL FRATZSCHER

Abstract

Many central banks share the practice of "purdah", a guideline of abstaining from communication around policy meetings. Although seemingly contradicting the virtue of transparency by withholding information precisely when it is sought after intensely, it has been justified on grounds that such communication may create excessive market volatility. This paper assesses the purdah for the Federal Reserve and confirms that financial markets are substantially more sensitive to central bank communication around policy meetings. Short-term interest rates react three to four times more strongly in the purdah before Federal Open Market Committee meetings than otherwise, and volatility increases (compared to a reduction otherwise). Copyright (c) 2009 The Ohio State University.

Suggested Citation

  • 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.
  • Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:2-3:p:517-528
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    References listed on IDEAS

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    Cited by:

    1. 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.
    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," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    3. 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.
    4. Benjamin Born & Michael Ehrmann & Marcel Fratzscher, 2011. "How Should Central Banks Deal with a Financial Stability Objective? The Evolving Role of Communication as a Policy Instrument," Chapters,in: Handbook of Central Banking, Financial Regulation and Supervision, chapter 9 Edward Elgar Publishing.
    5. 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.
    6. Gabriel Caldas Montes & Rodolfo Tomás da Fonseca Nicolay, 2015. "Central bank’s perception on inflation and inflation expectations of experts: Empirical evidence from Brazil," Journal of Economic Studies, Emerald Group Publishing, vol. 42(6), pages 1142-1158, November.
    7. Mickaël Clévenot & Ludovic Desmedt & Matthieu Llorca, 2010. "Le banquier central, du mutisme à la communication permanente : la tonalité du discours de la B.C.E. et son impact," Post-Print hal-01089003, HAL.
    8. Kevin Krieger & Nathan Mauck & Denghui Chen, 2012. "VIX changes and derivative returns on FOMC meeting days," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(3), pages 315-331, September.
    9. Giovanni Lombardo & Peter McAdam, 2010. "Incorporating financial frictions into new-generation macro models," Research Bulletin, European Central Bank, vol. 9, pages 13-16.
    10. Benjamin Born & Michael Ehrmann & Marcel Fratzscher, 2011. "Macroprudential policy and central bank communication," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 107-110 Bank for International Settlements.
    11. Jan-Egbert Sturm & Jakob Haan, 2011. "Does central bank communication really lead to better forecasts of policy decisions? New evidence based on a Taylor rule model for the ECB," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(1), pages 41-58, April.
    12. Roman HORVATH & Pavel KARAS, 2013. "Central Bank Communication and Interest Rates: The Case of the Czech National Bank," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(5), pages 454-464, November.
    13. repec:eee:ecofin:v:42:y:2017:i:c:p:597-617 is not listed on IDEAS
    14. repec:pri:cepsud:161blinder is not listed on IDEAS
    15. 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.
    16. Angela Maddaloni & José-Luis Peydró, 2010. "Bank lending standards and the origins and implications of the current banking crisis," Research Bulletin, European Central Bank, vol. 9, pages 6-9.
    17. Esteban Colla de Robertis, 2010. "Monetary Policy Committees and the Decision to Publish Voting Records," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 97-139, July-Dece.
    18. Fiorella De Fiore & Oreste Tristani, 2010. "Financial conditions and monetary policy," Research Bulletin, European Central Bank, vol. 9, pages 10-12.
    19. Domenico Lombardi, Pierre Siklos, Samantha St. Amand, 2018. "Asset Price Spillovers From Unconventional Monetary Policy: A Global Empirical Perspective," LCERPA Working Papers 0109, Laurier Centre for Economic Research and Policy Analysis, revised 30 Jan 2018.
    20. 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, vol. 32(C), pages 412-431.
    21. Helder Ferreira de Mendonça & Ivando Faria, 2015. "Brazilian Central Bank communication and interest rate expectations," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 8(1-2), pages 25-44, July.
    22. Moessner, Richhild & Allen, William A., 2013. "Central bank swap line effectiveness during the euro area sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 167-178.
    23. 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.
    24. repec:gam:jecomi:v:5:y:2017:i:3:p:33-:d:110748 is not listed on IDEAS
    25. Cornelia Holthausen & Huw Pill, 2010. "The forgotten markets: How understanding money markets helps us to understand the financial crisis," Research Bulletin, European Central Bank, vol. 9, pages 2-5.

    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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