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ECB vs Bundesbank: Diverging Tones and Policy Effectiveness

Author

Listed:
  • Peter Tillmann

    () (Justus-Liebig-University Giessen)

  • Andreas Walter

    () (Justus-Liebig-University Giessen)

Abstract

The present paper studies the consequences of con flicting narratives for the transmission of monetary policy shocks. We focus on con flict between the presidents of the ECB and the Bundesbank, the main protagonists of monetary policy in the euro area, who often disagreed on policy over the past two decades. This con flict received much attention on financial markets. We use over 900 speeches of both institutions' presidents since 1999 and quantify the tone conveyed in speeches and the divergence of tone among both both presidents. We find (i) a drop towards more negative tone in 2009 for both institutions and (ii) a large divergence of tone after 2009. The ECB communication becomes persistently more optimistic and less uncertain than the Bundesbank's after 2009, and this gap widens after the SMP, OMT and APP announcements. We show that long-term interest rates respond less strongly to a monetary policy shock if ECB-Bundesbank communication is more cacophonous than on average, in which case the ECB loses its ability to drive the slope of the yield curve. The weaker transmission under high divergence re ects a muted adjustment of the expectations component of long-term rates.

Suggested Citation

  • Peter Tillmann & Andreas Walter, 2018. "ECB vs Bundesbank: Diverging Tones and Policy Effectiveness," MAGKS Papers on Economics 201820, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201820
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    File URL: https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2018/20-2018_tillmann.pdf
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    References listed on IDEAS

    as
    1. Schupp, Fabian & Geiger, Felix, 2018. "With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181529, Verein für Socialpolitik / German Economic Association.
    2. Schupp, Fabian & Geiger, Felix, 2018. "With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181529, Verein für Socialpolitik / German Economic Association.
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    Cited by:

    1. Tillmann, Peter & Walter, Andreas, 2019. "The effect of diverging communication: The case of the ECB and the Bundesbank," Economics Letters, Elsevier, vol. 176(C), pages 68-74.
    2. Paul Hubert & Fabien Labondance, 2019. "Central bank tone and the dispersion of views within monetary policy committees," Working Papers 2019-08, CRESE.

    More about this item

    Keywords

    Central bank communication; diverging tones; speeches; text analysis; monetary transmission;

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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