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Central banks and policy communication: How emerging markets have outperformed the Fed and ECB

Author

Listed:
  • Tatiana Evdokimova

    (Joint Vienna Institute)

  • Piroska Nagy Mohacsi

    (London School of Economics and Political Science)

  • Olga Ponomarenko

    (Caplight)

  • Elina Ribakova

    (Peterson Institute for International Economics)

Abstract

This paper uses innovative natural language processing techniques to analyze central bank communication in emerging-market (EM) central banks and compare it with that of the Federal Reserve (Fed) and the European Central Bank (ECB). Once laggards of the central banking policy scene, EM central banks have made remarkable progress in improving their policy frameworks in the past two decades. They adopted many of the principles of advanced-economy (AE) central banks both in policy conduct and communication, but with modifications that reflect their specific circumstances of capital flow volatility, financial dollarization, and traditionally weaker credibility. The authors find that EM central banks' transparency has improved dramatically; their statements' readability has overall been better than in AEs; their focus on inflation has been sharper; and they have used data-shy "forward guidance" sparingly and flexibly. Worryingly though, most central banks do not communicate on inflationary pressures until after inflation already happens. EMs have outperformed AEs in two critical respects recently: addressing rising post-COVID inflationary pressures in a timely manner and, related, avoiding banking sector stress during the monetary policy tightening cycle. Systemic support in the form of currency swaps and repo operations by the Fed and the ECB with powerful signaling at times of acute market stress also helped. EM central banks have also started moving towards easing monetary policy already, ahead of the Fed and the ECB. Bringing down inflation fast and sustainably will be the ultimate test for the quality of EM central bank frameworks. The authors conclude with policy lessons for both EM and AE central banks. These include better forecasting and communication of inflation by the majority of central banks; more consistent delivery by EM central banks of communicated policy action; discarding pure "forward guidance" that hampers data dependency and thus fast policy action particularly at times of rapid change; consistent focus on supply-side factors of inflation; and for multiple-goal central banks, a clear choice and communication of policy priorities at times of possible conflict among some of the goals. The paper also suggests a more transparent communication of coordination with fiscal authorities that would improve the credibility of both the monetary and fiscal authorities.

Suggested Citation

  • Tatiana Evdokimova & Piroska Nagy Mohacsi & Olga Ponomarenko & Elina Ribakova, 2023. "Central banks and policy communication: How emerging markets have outperformed the Fed and ECB," Working Paper Series WP23-10, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp23-10
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    File URL: https://www.piie.com/publications/working-papers/central-banks-and-policy-communication-how-emerging-markets-have
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    Cited by:

    1. Jean-Charles Bricongne & Baptiste Meunier & Raquel Caldeira, 2024. "Should Central Banks Care About Text Mining? A Literature Review," Working papers 950, Banque de France.

    More about this item

    Keywords

    central banking; monetary policy; emerging markets; Federal Reserve; ECB; communication; inflation-targeting; currency swaps; supply-side inflation; forward guidance; Chat GPT; AI;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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

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