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The effects of central bank’s verbal guidance: evidence from the ECB

Author

Listed:
  • Maddalena Galardo

    () (Bank of Italy)

  • Cinzia Guerrieri

    () (LUISS Guido Carli)

Abstract

In this paper we propose a new indicator of central bank’s verbal guidance, which measures communications about the future based on the frequency of future verbs in monetary policy statements. We consider the press conferences of the European Central Bank as a test case. First, we analyze the main determinants of our index and estimate the unexpected component. Second, we investigate the effects of the identified change in verbal guidance on daily movements in forward money market rates between September 2007 and December 2015. Our results show that financial markets’ expectations on future short-term interest rates react to a communication shock about the future: after controlling for the standard policy rate shock and the announcement of unconventional monetary policies, the effect turns out to be negative and larger for longer horizons. This suggests that verbal guidance has proven to be an effective policy instrument for signalling an accommodative monetary policy stance.

Suggested Citation

  • Maddalena Galardo & Cinzia Guerrieri, 2017. "The effects of central bank’s verbal guidance: evidence from the ECB," Temi di discussione (Economic working papers) 1129, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1129_17
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2017/2017-1129/en_tema_1129.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sergio Masciantonio & Andrea Zaghini, 2017. "Systemic risk and systemic importance measures during the crisis," Temi di discussione (Economic working papers) 1153, Bank of Italy, Economic Research and International Relations Area.
    2. Pierluigi Bologna, 2017. "Banks’ maturity transformation: risk, reward, and policy," Temi di discussione (Economic working papers) 1159, Bank of Italy, Economic Research and International Relations Area.
    3. Coenen, Günter & Ehrmann, Michael & Gaballo, Gaetano & Hoffmann, Peter & Nakov, Anton & Nardelli, Stefano & Persson, Eric & Strasser, Georg H., 2017. "Communication of monetary policy in unconventional times," CFS Working Paper Series 578, Center for Financial Studies (CFS).
    4. Edoardo Rainone, 2017. "Pairwise trading in the money market during the European sovereign debt crisis," Temi di discussione (Economic working papers) 1160, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    central bank communication; textual analysis; European Central Bank; signalling channel; unconventional monetary policy; event-study analysis;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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