IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Impact of ECB Communication on Financial Market Expectations

This paper analyzes European financial markets’ comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB’s introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB’s interpretation and forecasts of price developments represent important news to financial market agents.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 06-135.

in new window

Length: 29 pages
Date of creation: Apr 2006
Date of revision:
Handle: RePEc:kof:wpskof:06-135
Contact details of provider: Postal: Leonhardstrasse 21, CH-8092 Zürich
Phone: +41 44 632 42 39
Fax: +41 44 632 12 18
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Geraats, P.M, 2005. "Transparency of Monetary Policy: Theory and Practice," Cambridge Working Papers in Economics 0549, Faculty of Economics, University of Cambridge.
  2. David-Jan Jansen & Jakob de Haan, 2004. "Look Who's Talking: ECB communication during the first years of EMU," DNB Working Papers 007, Netherlands Central Bank, Research Department.
  3. Charles L. Evans & David Marshall, 2001. "Economic determinants of the nominal treasury yield curve," Working Paper Series WP-01-16, Federal Reserve Bank of Chicago.
  4. Orphanides, Athanasios & Williams, John C., 2003. "Imperfect knowledge, inflation expectations, and monetary policy," CFS Working Paper Series 2003/40, Center for Financial Studies (CFS).
  5. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  6. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2002. "Market-based measures of monetary policy expectations," Finance and Economics Discussion Series 2002-40, Board of Governors of the Federal Reserve System (U.S.).
  7. Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," FRB Atlanta Working Paper No. 2003-21, Federal Reserve Bank of Atlanta.
  8. Jeffery Amato & Stephen Morris & Hyun Song Shin, 2003. "Communication and Monetary Policy," Levine's Working Paper Archive 506439000000000330, David K. Levine.
  9. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
  10. Ehrmann, Michael & Fratzscher, Marcel, 2007. "The timing of central bank communication," European Journal of Political Economy, Elsevier, vol. 23(1), pages 124-145, March.
  11. Fratzscher, Marcel, 2008. "Communication and exchange rate policy," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1651-1672, December.
  12. Michael Woodford, 2005. "Central Bank Communication and Policy Effectiveness," NBER Working Papers 11898, National Bureau of Economic Research, Inc.
  13. Timothy Cook & Thomas Hahn, 1990. "Interest rate expectations and the slope of the money market yield curve," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 3-26.
  14. Campbell, John, 1995. "Some Lessons from the Yield Curve," Scholarly Articles 3163264, Harvard University Department of Economics.
  15. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 343-361, March.
  16. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
  17. 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, 03.
  18. Fratzscher, Marcel, 2005. "How successful are exchange rate communication and interventions? Evidence from time-series and event-study approaches," Working Paper Series 0528, European Central Bank.
  19. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  20. Berger, Helge & de Haan, Jakob & Sturm, Jan-Egbert, 2006. "Does money matter in the ECB strategy? New evidence based on ECB communication," Discussion Papers 2006/1, Free University Berlin, School of Business & Economics.
  21. David-Jan Jansen & Jakob de Haan, 2005. "Were Verbal Efforts to Support the Euro Effective? A High-Frequency Analysis of ECB Statements," DNB Working Papers 033, Netherlands Central Bank, Research Department.
  22. Carlo Rosa & Giovanni Verga, 2005. "Is ECB Communication Effective?," CEP Discussion Papers dp0682, Centre for Economic Performance, LSE.
  23. Heinemann, Friedrich & Ullrich, Katrin, 2005. "Does it Pay to Watch Central Bankers' Lips? The Information Content of ECB Wording," ZEW Discussion Papers 05-70, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  24. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
  25. Andersson, Malin & Dillén, Hans & Sellin, Peter, 2001. "Monetary Policy Signaling and Movements in the Swedish Term Structure of Interest Rates," Working Paper Series 132, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jan 2004.
  26. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
  27. Frederic S. Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," NBER Working Papers 10829, National Bureau of Economic Research, Inc.
  28. Michelle R. Garfinkel & Seonghwan Oh, 1990. "When and How Much to Talk: Credibility and Flexibility in Monetary Policy With Private Information," UCLA Economics Working Papers 593, UCLA Department of Economics.
  29. Eijffinger, S.C.W. & Hoeberichts, M.M. & Schaling, E., 1997. "Why Money Talks and Wealth Whispers : Monetary Uncertainty and Mystique," Discussion Paper 1997-47, Tilburg University, Center for Economic Research.
  30. Robrt G. King & André Kurmann, 2002. "Expectations and the term structure of interest rates : evidence and implications," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 49-95.
  31. Stephan Sauer & Jan-Egbert Sturm, 2003. "Using Taylor Rules to Understand ECB Monetary Policy," CESifo Working Paper Series 1110, CESifo Group Munich.
  32. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
  33. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Communication and decision-making by central bank committees: different strategies, same effectiveness?," Working Paper Series 0488, European Central Bank.
  34. Gerlach-Kristen, Petra, 2003. "Interest rate reaction functions and the Taylor rule in the euro area," Working Paper Series 0258, European Central Bank.
  35. Ehrmann, Michael & Fratzscher, Marcel, 2005. "How should central banks communicate?," Working Paper Series 0557, European Central Bank.
  36. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  37. Demiralp, Selva & Jorda, Oscar, 2004. "The Response of Term Rates to Fed Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 387-405, June.
  38. Seth B. Carpenter, 2004. "Transparency and monetary policy: what does the academic literature tell policymakers?," Finance and Economics Discussion Series 2004-35, Board of Governors of the Federal Reserve System (U.S.).
  39. Gordon H. Sellon, Jr., 2004. "Expectations and the monetary policy transmission mechanism," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-41.
  40. Antulio N. Bomfim, 2003. "Monetary policy and the yield curve," Finance and Economics Discussion Series 2003-15, Board of Governors of the Federal Reserve System (U.S.).
  41. V. Vance Roley & Gordon H. Sellon, Jr., 1995. "Monetary policy actions and long-term interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-89.
  42. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  43. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  44. Michael Dotsey & Christopher Otrok, 1995. "The rational expectations hypothesis of the term structure, monetary policy, and time-varying term premia," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 65-81.
  45. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kof:wpskof:06-135. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.