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How should central banks communicate?

Author

Listed:
  • Ehrmann, Michael
  • Fratzscher, Marcel

Abstract

The paper shows that central bank communication is a key determinant of the market's ability to anticipate monetary policy decisions and the future path of interest rates. Comparing communication policies by the Federal Reserve, the Bank of England and the ECB since 1999, we find that communicating the diversity of views among committee members about monetary policy lowers the market's ability to anticipate policy decisions as well as the future path of interest rates. This effect is sizeable, accounting for instance for one third to half of the prediction errors of FOMC policy decisions. By contrast, individualistic communication regarding the economic outlook is found to be beneficial for the Federal Reserve, enabling market participants to better anticipate the future path of interest rates. Thus, it is the collegiality of views on monetary policy but the diversity of views on the economic outlook that enhance the effectiveness of central bank communication. JEL Classification: E43, E52, E58, G12

Suggested Citation

  • Ehrmann, Michael & Fratzscher, Marcel, 2005. "How should central banks communicate?," Working Paper Series 557, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005557
    Note: 203739
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp557.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bank of England; committee; communication; economic outlook; effectiveness; European Central Bank.; Federal Reserve; monetary policy;
    All these 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

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