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What Drives Clarity of Central Bank Communication About Inflation?

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Abstract

This paper examines whether the clarity of central bank communication about inflation varies with the economic environment. Using readability statistics and content analysis, we study the clarity of communication on the inflation outlook by seven central banks across three continents during the recent decade. We uncover significant and persistent differences in clarity over time and across countries. However, identifying determinants of clarity that are robustly relevant across our sample of central banks proves elusive. Overall, our findings suggest that a single model for clarity of central bank communication is not appropriate. Rather, when studying clarity of communication, country-specific and institution-specific factors are highly relevant. © 2012 Springer Science+Business Media New York (outside the USA).

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... 9 This study relies on the readability index proposed by Jansen (2011aJansen ( , 2011b. Bulíř et al. (2013) further examine central bank clarity of inflation reports the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank. Relying on the Flesch-Kincaid grade level as a measure of textual clarity (Kincaid et al., 1975), they were able to quantify the inflation reports' readability. ...
... This indeed brings attention to SARB's communication framework and whether this was a deliberate effort to ease readability in a bid to aid comprehension post 2015. However, this raises the question of whether the SARB's easing of its MPC statements' readability has yielded more clarity as qualified by Bulíř et al. (2013). ...
... As illustrated in Figures 1 and 2, the computations exhibits more sharp movements in both the Flesch Reading Ease Score Computation and the Flesch-Kincaid grade level index in the wake of the 2008 financial crisis. Bulíř et al. (2013) determined that central banks sought to reassure the public during the global financial crisis and this is evidently reaffirmed in SARB's MPC communications. As illustrated in Figure 1, the in 2009, Flesch-Kincaid Grade Level drops from 13 to just over 10 as the Flesch Reading Ease Score rises from 40 to 53 (see Figure 2). ...
Article
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In 2000, South Africa's central bank, the South African Reserve Bank (SARB), adopted flexible inflation targeting as a monetary regime, and in doing so, set its inflation target at 3-6% for the headline consumer price index (Coco & Viegi, 2020). Essential to achieving this inflation target is not only clear communication of ex-post policy actions, but a clear dissemination of the SARB's future actions. This paper examines how the SARB has been communicating, with particular emphasis on their Monetary Policy Committee (MPC) press statements between January 2000 and January 2021. The breadth of the sample space is informed by a necessity to explore changes in the SARB's communication strategies. In particular, this study considers the role of the SARB's MPC press releases, and given the wide span of the sample, it offers an inquiry into what has changed over the 21-year period, hence considering whether there has been more clarity in the SARB's communication over that time. This question is answered using the Flesch and Flesch-Kincaid methods, which are widely accepted in central bank communication literature. The two methods gauge how difficult a passage in English is to understand, and are thus used to assess readability hence clarity. In evaluating central bank communications and upon surveying the data, the paper offers empirical evidence about the clarity of the SARB's MPC meeting statements spanning over two decades, and clearly exhibiting its evolution. This study finds that SARB communications' Flesch Reading Ease Score Computation is way above and fluctuates more than the Flesch-Kincaid Grade Level Computation, exhibiting a random fluctuation between 2000 and 2015. Therefore, despite SARB's MPC statements exhibiting more readability, their reliance on academic words has made them more complex and difficult to understand.
... Since then, central bank communication represents an important tool to monetary policy effectiveness (Blinder et al. 2001(Blinder et al. , 2008. The literature on central bank communication continues to evolve and researches have been drawing attention to the importance of clarity of central bank communication (Jansen 2011a(Jansen , 2011bBulíř, Čihák, and Jansen 2013a;Bulíř, Čihák, and Šmídková 2013b;Montes et al. 2016). This emerging literature stresses that the clarity of central bank communication is important to reduce uncertainties, and thus it may represent a key aspect for central banks to achieve their goals. ...
... Jansen (2011a) presents the rationale for the link between transparency and clarity arguing that 'readability is a fundamental precondition for transparency' (496). Thus, claritymeasured through the readability index proposed in Jansen (2011aJansen ( , 2011b, Bulíř, Čihák, and Jansen (2013a) and Montes et al. (2016) can be considered as an important tool to build credibility. ...
... Agénor and Taylor 1992;Svensson 2000;Cecchetti and Krause 2002;de Mendonça 2007;de Mendonça and de Guimarães E Souza 2009;Nahon and Meurer 2009;Montes and Bastos 2014), credibility is higher when inflation expectations are close to the target, which means agents believe central bank can achieve its goal. Besides, we make use of two clarity indexes presented in Jansen (2011aJansen ( , 2011b and also utilized by Bulíř, Čihák, and Jansen (2013a) and Montes et al. (2016). The indexes are the Flesh ease score (Flesch 1948) and the Flesh-Kincaid grade level (Kincaid et al. 1975). ...
Article
Central banks have made great efforts to increase transparency and accountability to the public. Since then, studies seek empirical evidences about the effects of monetary policy communication over agent’s expectations. The recent literature on central bank communication draws attention to the importance of clarity of central bank communication. However, researches on this theme are still scarce, and there are few empirical studies with conclusive findings. Our study seeks empirical evidences on the relation between clarity of central bank communication and credibility of monetary policy. Estimates through different methods aim to identify whether clarity of central bank communication improves credibility. The study is the first to provide empirical evidence that a clearer communication can improve credibility. We also consider the differences between the two governors who ruled the Central Bank of Brazil in the period under analysis. The results indicate that a clear communication can improve credibility, but it depends on the commitment of the central banker with the goal of inflation control. Furthermore, estimates based on quantile regression indicate that the benefit brought by the clarity to the credibility depends on the commitment of the monetary authority with the goal guiding inflation expectations.
... Another possibility is to look at the formal quality thereof. Some banks write better than others (Fracasso et al. 2003) and well-written texts have a better chance of being understood as intended (Jansen 2011;Bulíř et al. 2013). Bulíř et al. (2012) looked at consistency among various communication tools, such as monetary policy reports and press releases, finding that banks with well-developed policy analysis systems write more clearly. ...
... Ehrmann and Fratzscher (2007) and Bulíř et al. (2012) argued that central banks possess knowledge about the overall balance of inflation risks rather than about the detailed factors. Institutions facing financial crises have technical difficulty disentangling the various factors and political difficulty to communicate their findings (Bulíř et al. 2013). ...
... We quantify the reported factors using content analysis (Guthrie and Wright 2000;Bulíř et al. 2013) employing a unique new database based on monetary policy reports. Each FL factor is catalogued into a supply, demand, or foreign exchange factor and classified as pushing the future rate of inflation either higher (+1), lower (−1), or neither (0). ...
Article
Full-text available
We offer a novel methodology for assessing the quality of central bank monetary policy reports. We evaluate their economic content by comparing verbally reported inflation factors with factors identified from a simple new Keynesian model. Positive correlations indicate that the reported inflation factors were similar to the model-identified ones, marking high-quality inflation reports. Although sample bank reports on average identified inflation factors correctly, the degree of forward-looking reporting varied.
... (2) We analyse the influence of clarity of central bank communication on disagreement about inflation expectations. Thus, following the still incipient literature on the clarity of central bank communication (Jansen 2011a(Jansen , 2011bBulíř, Čihák, and Jansen 2013), we use a well-established statistic from the literature on readability, the Flesch (1948) statistic (or the Flesch reading ease score). (3) We investigate whether greater transparency coincides with lower levels of disagreement in inflation expectations. ...
... The increase in monetary policy communication in the past decades has been justified by benefits of policy transparency (Čihák 2007;Geraats 2002). Most of the empirical literature on central bank communication has focused either on quantitative measures of monetary policy transparency or short-term effects of central bank announcements, with much less attention paid to the overall clarity of the communication (Bulíř, Čihák, and Jansen 2013). However, an important question arose: does clarity of central bank communication matter? ...
... The results indicate that there is no significant difference between the clarity of the two Federal Reserve chairmen. Bulíř, Čihák, and Jansen (2013) also measured the clarity with Flesch (1948) and Kincaid et al. (1975). They examined whether the clarity of central bank communication about inflation varies with the economic environment in six countries (Chile, Czech Republic, Poland, Sweden, Thailand and the UK) and the euro area. ...
Article
The literature on transparency and central bank communication and the literature on disagreement about expectations are evolving; however, both have been evolving separately. Despite the advances in the literature, several key issues remain open and there are gaps to be filled. Therefore, this study analyses the effects of monetary policy signalling and clarity of central bank communication on disagreement about inflation expectations. It also investigates whether greater transparency coincides with lower levels of disagreement in inflation expectations in Brazil. The findings suggest that transparency is important to reduce disagreement about inflation expectations. Moreover, our estimates indicate that central bank communication and clarity affect disagreement about inflation expectations in Brazil.
... Since economic agents use all available information in order to form their expectations, transparency and, therefore, central bank communication play a key role in the expectations formation process (Blinder et al., 2008). Although many advances have already been made, the literature on central bank communication continues to evolve (Rosa and Verga, 2007;Fratzscher, 2007a and2007b;Ullrich, 2008;Montes and Scarpari, 2015) and studies have been drawing attention to the importance of clarity of central bank communication (Jansen, 2011;Bulíř et al. 2013a;Bulíř et al., 2013b). In this sense, how beneficial are transparency, monetary policy signaling and the clarity of central bank communication for the expectations formation process? ...
... The results indicate there is no significant difference between the clarity of the two Federal Reserve chairmen. Bulíř et al. (2013a) also measures clarity with Flesh (1948) and Kincaid et al. (1975). They study the determinants of central bank communication about inflation and analyze six countries (Chile, Czech Republic, Poland, Sweden, Thailand and United Kingdom) and the Euro Area. ...
Conference Paper
Full-text available
The literature on transparency and central bank communication and the literature on disagreement about expectations are evolving; however, both have been evolving separately. Despite the advances in the literature, several key issues remain open and there are gaps to be filled. Therefore, this study analyses the effects of monetary policy signaling and clarity of central bank communication on disagreement about inflation expectations and, it investigates whether greater transparency coincides with lower levels of disagreement in inflation expectations in Brazil. The findings suggest transparency is important to reduce the disagreement about inflation expectations. Moreover, the estimates indicate central bank communication and clarity of central bank communication affect the disagreement about inflation expectations in Brazil.
... In particular they established a career effect between new and existing members of the committee in terms of discipline and conformity effect. Bulíř,Čihák, and Jansen (2013) performed human coding on text fragments containing central-bank assessments of IT matters, and they evaluated the clarity of those texts through the Flesch-Kincaid Grade Level. The authors found enhanced communications readability in Chile, lesser readability in Thailand, and an even level in the Czech Republic, Poland, Sweden, and the European central banks. ...
... Although the release of minutes is generally regarded as a step toward procedural transparency, and therefore, toward IT success, this study examined the contents and clarity of these documents as crucial transparency elements in the Latin American context, in a way that had not been done thus far. Bulíř et al. (2013) carried out a related analysis of the clarity of the communication tools of central banks. Their study focused on inflation reports, monetary policy reports, and press releases in seven countries implementing IT. ...
Article
The disclosure of the minutes of the Boards of Directors of central banks (procedural transparency within the inflation targeting (IT) literature) implies the challenge of sending a clear message. Regardless of whether the document released is a brief, moderate, or highly detailed (verbatim) account of a Board's discussion, its contents often align expectations and define an effective monetary policy to curb inflation. This paper provides a quantitative perspective of procedural transparency by performing a text analysis of the minutes of Board meetings in the central banks of Brazil, Chile, Colombia, Mexico, and Peru. The study examined the lengths of the minutes, their frequent vocabulary (including its association with a predefined central-bank terminology), and their readability (through a reading ease index).
... 8 In evaluating the effects of central banks' policies on inflation expectations, the literature has largely focused on whether inflation targeting makes inflation expectations of financial markets and professional forecasts less sensitive to macroeconomic news shocks (e.g., Beechey et al., 2011, Gürkaynak et al. 2010). More recent studies examine how forward guidance changed expectations of these agents (e.g., Campbell et al. 2012, Bulir et al., 2012, Andrade et al. 2015, Wong, 2015. Other work has sought to establish whether inflation targeting regimes have more anchored expectations of professional forecasters (Pierdzioch and Rülke, 2013;Dovern et al., 2012). ...
... Source: Coibion et al. (2018d). 20 Bulir, Jansen, and Cihak Bulir et al. (2012) of communications: "Explaining our analysis at some length is a richer source of information for markets than code words or statements about the future path of interest rates. Less weight should be placed on the short statements that are published with the announcements of our decisions because such statements, as we have seen elsewhere, run the risk of becoming monetary policy by code word. ...
Article
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We assess the prospects for central banks using inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms' expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households' nor firms' expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers could pierce this veil of inattention through new communication strategies as well as the potential pitfalls to trying to do so.
... First of all, the contents of communication must be distinguished, which can be either a quantitative (Hayo and Neuenkirch, 2010) or a qualitative announcement; further the issues -macroeconomic performances, including inflation (Cihak et al., 2012) and fiscal policies (Allard et al., 2012) -or financial stability (Born et al., 2010 and) -can be relevant. ...
... The four lines denote the average yearly values of the clarity of the reports. In line with Bulíř et al. (2013), there is evidence of a decrease in clarity around the start of the global financial crisis in 2008. However, except for the UK, the decrease in clarity of reports seems temporary rather than permanent. ...
Article
Full-text available
We study whether increased clarity of central bank reports on monetary policy can reduce volatility of returns in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level. In contrast to much of the recent literature, we find only limited evidence of a negative relationship between clarity of monetary policy reports and market volatility. We conclude that reducing volatility using clearer reports is not straightforward, especially in times of crisis.
... 1 At this point, we note that our study -as well as the study presented by Mendonça and Nicolay (2017) Hence, readability is a key piece in this framework. Clarity relates to the lucidity and readability of the text (Jansen, 2011a and2011b;Bulíř et al., 2013;Montes et al., 2016;Jansen and Moessner, 2016;de Mendonça and Nicolay, 2017;Montes and Nicolay, 2017). If someone has to process a text with long words or sentences, it will be harder to grasp the message (Jansen, 2011b). ...
Conference Paper
Full-text available
This paper analyzes the effects of fiscal communication and clarity of announcements about fiscal policy on public debt uncertainty. Using different econometric techniques (OLS, GMM, ARDL and Quantile Regressions), the results indicate that, in order to reduce uncertainties about the future behavior of public debt, it is not enough to simply increase the volume of communication about fiscal policy. The provision of more information through communication must be accompanied by improvements in the clarity of the announcements released. Thus, our findings reveal that as clarity of fiscal announcements increases, the stronger is the effect of improvements in communication from fiscal authority in reducing public debt uncertainty; and this effect is even stronger when public debt uncertainty is higher.
... Hence, readability is a key piece in this framework. Clarity relates to the lucidity and readability of the text (Bulíř, Čihák, & Jansen, 2013;de Mendonça & Nicolay, 2017;Jansen & Moessner, 2016;Jansen, 2011aJansen, , 2011bMontes & Nicolay, 2017;Montes et al., 2016). If someone has to process a text with long words or sentences, it will be harder to grasp the message (Jansen, 2011b). ...
Article
This paper analyzes the effects of fiscal communication and clarity of announcements about fiscal policy on public debt uncertainty. Using different econometric techniques (OLS, GMM and Quantile Regressions), the results indicate that the provision of more information through communication must be accompanied by improvements in the clarity of the announcements released. Thus, our findings reveal that as clarity of fiscal announcements increases, the stronger is the effect of improvements in communication from fiscal authority in reducing public debt uncertainty; and this effect is even stronger when public debt uncertainty is higher.
... What drives the clarity of central bank communication? Bulíř, Čihák and Jansen (2013) analyze this question considering seven central banks. The main result of this study is that country-specific and institution-specific factors are relevant. ...
Article
Purpose Studies about the determinants of the clarity of central bank communication are still scarce. To our knowledge, there are no studies regarding emerging economies. The present study contributes to the literature in the following aspects: it analyzes the determinants of the clarity of the central bank communication in an inflation targeting emerging economy; it observes the influence of inflation volatility over the clarity; and it observes the effect of the monetary policy signaling over the clarity. Design/methodology/approach The work uses readability indexes to measure the clarity of central bank communication. The empirical analysis uses ordinary least squares and the generalized method of moments with one and two-step estimations. Findings The findings suggest the inflation volatility reduces the clarity of central bank communication. Moreover, the monetary policy signaling also affect the clarity, but the effect depends on the direction of the signal. Practical implications This paper observes the determinants of the clarity considering an emerging economy environment. The clarity of central bank communications is an important tool to access transparency. Hence, the analysis of what determines the clarity of central bank communication is a debate about the level of transparency accessed by the central bank. Originality/value There are no studies about the determinants of the clarity of central bank communication in emerging economies. Moreover, the novelty are the effects of inflation volatility and monetary policy signaling over the clarity.
... By contrast, Wynne (2013) argued that policy statements may unsettle financial markets if they were too difficult to comprehend. Bulíř et al. (2013) highlighted that the clarity of central bank communication varied throughout the business cycle. The lengthier statements that have accompanied policy announcements in the modern era of unconventional monetary policy were more difficult to understand (Hernandez-Murillo and Shell 2014), which led to higher market volatility (Jansen 2011) and made it more difficult for central bankers to gauge the impact of their policy decisions. ...
Article
This paper examines the link between changes in the sentiment tone with respect to the European Central Bank’s (ECB) announcements and stock returns. The analysis constructs a new index that describes the tone of the sentiment derived from these announcements, spanning the period January 2002 to June 2016. The novelty of this work relies on the development of a unique sentiment index associated with the messages conveyed by the ECB’s activities and the effect of this index on both the mean and the volatility of certain major international stock markets. In this context, the sentiment index is present in both the conditional mean and the volatility equations. The findings indicate a significant impact on both the mean and the volatility of returns, whereas the news sentiment/stock returns association increases in strength during the crisis period. The findings survive a robustness check based on the characteristics of the ECB governor’s personality.
... This paper concentrates on the ECB and Federal Reserve during the crisis period of 2007 to 2010, but a more comprehensive listing of central banks, their current status and monetary policy systems can be found, for example, in Mossner at al. (2017).7 The Federal Reserve set its first explicit inflation target in January 2012. ...
Article
Full-text available
Modern central banks increasingly value monetary policy transparency, and attempt to build credibility by communicating their decisions to the public. This paper studies whether the communication of central banks can be used to explain upcoming changes in their most important monetary policy instrument, the short-term refinancing rate, and whether the public can trust central bank communication during times of financial crisis. This is done by constructing an indicator to measure the predictability of monetary policy by calculating the median of the policy makers’ official comments. The performance of this indicator is studied with ordered probit methods. The results show that predictability was reached relatively well at central bank level during the financial crisis despite the rapid growth of economic uncertainty, and that communication can be a useful tool for central banks during uncertain times.
... There is also growing evidence from the media economics literature about media bias (Gentzkow and Shapiro, 2010) (Mishkin, 2004), clear (Bulíř, et al. (2013a) ;Bulíř, et al. (2013b); Siklos (2003); Winkler (2002)) and predictable (including Ehrmann and Fratzscher (2007); Poole and Rasche (2003)), or evaluating how various measures of inflation expectations move shortly after communication is released (Gürkaynack, et al. (2006);Gürkaynack, et al. (2005)). ...
Article
Full-text available
Inflation is a monetary policy outcome, but in the short to medium term, price and wage decisions are co-determined by the public and private sectors. Many central banks have adopted transparency as a strategic policy approach, whereby communication of monetary policy goals is used as a public anchor. While the central bank’s strategy involves carefully crafted, deliberately simplified messages, most of the public tends to access inflation-related information through the media. In this paper, we examine South African newspaper articles to identify how inflation is presented in the media and the role of the media, through this presentation, in the process of shaping public opinion around inflation expectations. We do this in two ways. First, we examine how inflation is presented in the media and then we identify the various actors presented in the media, their positions on inflation, and how these relate to each other. The systematic analysis of the media’s presentation of inflation allows us to identify some challenges to the central bank’s communication strategy.
... There is also growing evidence from the media economics literature about media bias (Gentzkow and Shapiro, 2010) (Mishkin, 2004), clear (Bulíř, et al. (2013a) ;Bulíř, et al. (2013b); Siklos (2003); Winkler (2002)) and predictable (including Ehrmann and Fratzscher (2007); Poole and Rasche (2003)), or evaluating how various measures of inflation expectations move shortly after communication is released (Gürkaynack, et al. (2006);Gürkaynack, et al. (2005)). ...
Research
Full-text available
Inflation is a monetary policy outcome, but in the short to medium term, price and wage decisions are co-determined by the public and private sectors. Many central banks have adopted transparency as a strategic policy approach, whereby communication of monetary policy goals is used as a public anchor. While the central bank’s strategy involves carefully crafted, deliberately simplified messages, most of the public tends to access inflation-related information through the media. In this paper, we examine South African newspaper articles to identify how inflation is presented in the media and the role of the media, through this presentation, in the process of shaping public opinion around inflation expectations. We do this in two ways. First, we examine how inflation is presented in the media and then we identify the various actors presented in the media, their positions on inflation, and how these relate to each other. The systematic analysis of the media’s presentation of inflation allows us to identify some challenges to the central bank’s communication strategy.
... This paper contributes to the large and growing literature on central bank communications. One strand of the literature looks at central bank communications on their own terms, describing their style, sentiment and subject matter across time and across jurisdictions ( Bulíř et al., 2011;Allard et al., 2013;Schonhardt-Bailey 2013;Siklos 2013;Hansen et al., 2014 ). While most of these studies have, by necessity, analysed central bank communications in the public domain, a few recent contributions have examined private correspondences ( Goldsmith-Pinkham et al., 2016;Bholat et al., 2017 ). ...
Article
Central bankers and the central banking literature are increasingly attuned to the importance of communications as a policy tool. However, less is known about how central bank communications should be drafted for maximal impact. Our paper contributes new insights in this regard. Using a large-scale online experiment with a sample representative of the UK population, the paper documents the communicative techniques that increase public comprehension and trust in monetary and macroeconomic policy messages. Key findings include that the simplification of language increases public comprehension more than the inclusion of visuals, and that public comprehension can be improved by making monetary policy messages relatable to people's lives. Relatable content also increases the public's trust in central bank communications, and improves people's perceptions of the central bank. Our findings shed light on how central banks can improve communication with the public at a time when trust in public institutions has fallen, while the responsibilities delegated to central banks have increased.
... Es decir, el efecto para los títulos a 5 y 10 años no difiere de forma significativa. Resultados similares son obtenidos por Bulíř et al. (2013). ...
Article
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Este artículo examina los efectos de la comunicación del banco central sobre los títulos de deuda pública para una economía emergente. Se toma como estudio de caso la economía colombiana con datos referentes al periodo de 2008 a 2016 y se analizan los comunicados de prensa, las minutas y los reportes de inflación. Los hallazgos indican que la comunicación tiene efectos importantes sobre el nivel de los retornos de los títulos de deuda pública al día siguiente de los anuncios del banco central, y el efecto es mayor para las minutas de política monetaria.
... The way in which our indicators are constructed very much follows the procedure underlying the socalled KOF Monetary Policy Communicator (MPC), as published by the KOF Swiss Economic Institute and used, e.g., bySturm and de Haan (2011),Conrad and Lamla (2010),Lamla and Sturm (2013),Bulíř et al. (2013) andNeuenkirch (2013). The key difference is that the MPC is a leading indicator for monetary policy and therefore considers only forward-looking statements regarding prices. ...
Article
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Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In the case of the European Central Bank (ECB), forward guidance should have increased the informational content of the introductory statements at the press conferences following ECB policy meetings. We examine whether such ECB communication adds information to a shadow interest rate that summarizes the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. The ECB’s assessment of the economy, i.e., communication related to economic growth, triggers movements in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlooks. Not only are their growth forecasts affected, but so are their expectations for M3 growth and inflation.
... There is also growing evidence from the media economics literature about media bias (Gentzkow and Shapiro, 2010) (Mishkin, 2004), clear (Bulíř, et al. (2013a) ;Bulíř, et al. (2013b); Siklos (2003); Winkler (2002)) and predictable (including Ehrmann and Fratzscher (2007); Poole and Rasche (2003)), or evaluating how various measures of inflation expectations move shortly after communication is released (Gürkaynack, et al. (2006);Gürkaynack, et al. (2005)). ...
Article
Inflation is a monetary policy outcome, but in the short to medium term, price and wage decisions are co-determined by the public and private sectors. Many central banks have adopted transparency as a strategic policy approach, whereby communication of monetary policy goals is used as a public anchor. While the central bank’s strategy involves carefully crafted, deliberately simplified messages, most of the public tends to access inflation-related information through the media. In this article, we examine South African newspaper articles to identify how inflation is presented in the media and the role of the media, through this presentation, in the process of shaping public opinion around inflation expectations. We do this in two ways. First, we examine how inflation is presented in the media and then we identify the various actors presented in the media, their positions on inflation, and how these relate to each other. The systematic analysis of the media’s presentation of inflation allows us to identify some challenges to the central bank’s communication strategy.
... However, the increase in complexity of monetary policy during and after the financial crisis creates significant challenges for central bank communication (e.g., Bulíř, Čihák and Jansen, 2013a;Bulíř, Čihák and Šmídková, 2013b;Hernández-Murillo and Shell, 2014). As Peter Praet, former chief economist of the ECB, put it '[i]n normal times, central banks adapted their monetary policy stance by influencing the level of one short-term interest rate. ...
Preprint
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We empirically examine how complexity of ECB communications affects financial market trading based on high-frequency data from European stock index futures trading. Our sample covers ECB press conferences between January 2009 and December 2017, during which un-conventional monetary policy measures (UMPM) substantially increased communication complexity. Analysing the linguistic complexity of the introductory statements and differentiating between press conferences with and without UMPM-announcements, we find more complex communication, i.e. high linguistic complexity and UMPM-announcement, is associated with a lower level of contemporaneous trading activity. Moreover, complex communication leads to a temporal shift in trading activity towards the subsequent Q&A session, which suggests that Q&A sessions facilitate market participants' information processing. Finally, we document a relatively lower similarity of unconventional monetary policy statements and argue that this might explain our findings. JEL-Classification: D83, E52, E58, G12, G14
... Therefore, legibility is an important part of this framework. Clarity relates to the clarity and legibility of texts (Jansen, 2011a and2011b;Bulíř et al., 2013;Montes et al., 2016;Jansen and Moessner, 2016;Mendonca and Nicolay, 2017;Montes and Nicolay, 2017). If someone has to process text with long words or sentences, it will be more difficult to understand the message (Jansen, 2011b). ...
Article
Full-text available
Central bank communications play an important role in the monetary policy. In the inflation-targeting frameworks, central bank communications might guide public to shape inflation expectations and then determine actual inflation rates through which the policy interest rates policy would manage them. This paper studied the impact and central bank monetary policy communications on the policy interest rate. Unlike other studies, this paper uses two stages. First, we estimate the impact of central bank communication on the inflation expectation gap. Second, we use the estimated value of inflation expectation gap to predict the policy interest rate. The study found evidence that economic agents analyse the Governor Board of Central Bank of Indonesia meeting decisions every month to shape their inflation expectation. Therefore, the difference between inflation expectation and actual inflation tends to narrow. The inflation expectation gap affects the policy interest rates in Indonesia. In other words, the policy interest rates can control the inflation rate and anchor expectations as required by the inflation-targeting framework.
... Amaya et Filbien [2015] ;Hayo et Neuenkirch [2014] ;Bulir, Cihák et Jansen [2013]). Je considère également que si la structure des outils de communication des banques centrales est demeurée cohérente dans la période d'après-crise, cette dernière peut toujours avoir un impact significatif sur les marchés financiers. ...
Article
This paper proposes an alternative method to assess the usefulness of central banks' forward guidance since the start of the global financial crisis. Using the Wordscores methodology, I provide a quantitative analysis of the size of the expansionary monetary impulses, as expressed through the forward guidance of three central banks: the European Central Bank, the Federal Reserve and the Bank of England. The findings reveal that since 2009, central banks' communication delivers important insights to financial market participants on the persistence of their (un)conventional monetary measures, and in particular, on the future occurrence of an exit strategy through the so-called Odyssean forward guidance.
Article
How has the Crisis Affected the ‘Clean' Versus ‘Lean' Debate amongst Central Bankers? Has the financial crisis led to a paradigm shift in monetary policy? In particular, has central banks' strategy to deal with financial stability changed? Does the central bankers' pre-crisis consensus on dealing ex post with the financial instability during the bust of the bubble (cleaning up the bust afterwards) still prevail? Or on the contrary do central bankers now prefer acting ex ante against the growth of the financial bubble (leaning against the wind)? We examine whether the financial crisis has impacted this debate clean versus lean. We use the methods of the central bank communication literature. Ninety-four speeches on this debate, from members of the European Central Bank (ECB), the Federal Reserve (Fed) and the Bank of England, are studied over the period 2002-2012. Two main results emerge from the analysis and coding of these speeches. First, following the crisis the consensus on the ‘clean' strategy is relaxed in the three central banks inspected. The ECB particularly becomes clearly favorable to the opposite strategy of ‘lean'. Secondly, yet, there is no signal of a new central banking paradigm on financial stability as the Bank of England and the Fed remain favorable to the ‘clean' strategy. Classification JEL: D83, E52, G01.
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Words are critical in how the public perceives the work of central banks and the quality of monetary policy. Press releases that accompany policy rate decisions and, where available, the minutes of central bank committee meetings, are focal points for the media in public discussions about the conduct of monetary policy. Using data from five countries, this chapter examines whether the language used by central banks has changed since the Global Financial Crisis (GFC) began. Briefly, the findings show that concerns about financial stability peaked just as the global financial crisis reached its zenith. However, concerns over uncertainty about the current and anticipated state of the economy have also risen over time. More generally, central bank speak became more aggressive throughout the crisis years. More conventional expressions about the current stance of monetary policy took a back seat to other concerns in central bank policy statements and minutes.
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This article presents empirical evidence on the effect of regular Central Bank of Brazil (CBB) communication on volatility and the direction of the interest rates futures market. The volatility of interest rates in the financial market is observed before and after publication of regular CBB communication. Moreover, the period without publication (purdah period) is also considered. Hence, this article combines, in an original manner, the idea presented by Ehrmann and Fratzscher for evaluation of the impact of communication on financial market expectation, and the model developed by Kuttner , for analysis concerning the expectations hypothesis of the term structure of interest rate. The findings support the idea that CBB communication has an effect on expectations of changes in the interest rates and in the expected direction. Furthermore, CBB communication is more effective when made in the periods before meetings of the Monetary Policy Committee and publication of the respective minutes.
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Words are critical in how the public perceives the work of central banks and the quality of monetary policy. Press releases that accompany policy rate decisions and, where available, the minutes of central bank committee meetings, are focal points for the media in public discussions about the conduct of monetary policy. Using data from five countries, this chapter examines whether the language used by central banks has changed since the Global Financial Crisis (GFC) began. Briefly, the findings show that concerns about financial stability peaked just as the global financial crisis reached its zenith. However, concerns over uncertainty about the current and anticipated state of the economy have also risen over time. More generally, central bank speak became more aggressive throughout the crisis years. More conventional expressions about the current stance of monetary policy took a back seat to other concerns in central bank policy statements and minutes.
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Monetary policy announcements have a significant impact on financial market liquidity. This study provides a novel perspective on the factors driving this relationship in the market for 10-year Treasury note futures: Target rate surprises and the complexity of the monetary policy statement language are important determinants. Differences of opinion resulting from interpretation of complex language appear to result in more trading volume despite relatively low levels of liquidity (a negative liquidity-volume relationship), while large target rate surprises reduce trading activity (a positive liquidity-volume relationship). The dynamic changes over time, as unconventional polices are adopted by monetary authorities and, high frequency traders become more pervasive. Central bankers may aid market liquidity by minimizing surprises, and issuing statements that are easier to understand (with shorter sentences and more familiar words).
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The article reveals approaches to evaluate transparency of the central banks and, operating indices, measures it for the National bank of Ukraine. The quantitative analysis of the informational disclosure of the central banks of Ukraine, Czech Republic, Poland, and Russia is allocated. The aspects of the communications of the National Bank of Ukraine in the process of the monetary regime transformation are explored.
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This chapter assesses the communication strategies of the Federal Reserve (FED) and the European Central Bank (ECB), as well as their respective effectiveness. We explore the multi-dimensional aspects of the information embedded in more than 800 statements released by the heads of the EU and US central banks. Using tools from computational linguistics, we analyse the information released by these central banks on the state of economic conditions, as well as the guidance they provide about future monetary policy decisions. First, this chapter looks at some dimensions of the communication (tone, growth, ambiguity). Subsequently, we pay attention to the scenario’s impact on the communication strategies of the ECB and FED, assessing whether these strategies are influenced by certain variables that depict the scenario of the financial and real economy. Our results confirm the title of this chapter: most of the time, there is no significant difference between the communication strategy of the FED or the ECB, whether or not there is an improvement in the economic variables under consideration. We found that changes in communication strategy are mainly linked to changes in the health of the financial system.
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Inflation targeting requires clear and transparent central bank’s communication. Analysts and market participants understand it as a broad list of information disclosed by the central bank. The general public understands it rather as the ability of a central bank to speak and explain its decisions in a plain language. In recent decades, monetary authorities in many countries have made significant progress in this direction. However, there has been no research on the quality of communication for the Bank of Russia. This paper aims to create a tool for automated evaluation of the readability of the Bank of Russia’s monetary policy communication, taking into account the available experience of linguistic and textual analysis, including machine learning methods, as well as to provide recommendations for its improvement. This can contribute to improving the effectiveness of the Bank of Russia communication on monetary policy, which is vital for its credibility, anchoring inflation expectations, and predictability of the regulator’s decisions.
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The global financial crisis has renewed policymakers' interest in improving the policy framework for financial stability, and an open question is to what extent and in what form should financial stability reports be part of it. We examine the recent experience with central banks’ financial stability reports, and find - despite some progress in recent years - that forward-looking perspective and analysis of financial interconnectedness are often lacking. We also find that higher-quality reports tend to be associated with more stable financial environments. However, there is only a weak empirical link between financial stability report publication per se and financial stability. This suggests room for improvement in terms of the quality of financial stability reports.
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The readability of annual reports has been the focus of extensive prior research. However, the extent of readability variability has only recently received specific attention. In response to a perceived need for further research into this area, an analysis of 60 UK chairman’s statements was conducted in order to test for possible determinants of readability variability. Results show the introduction to the chairman’s statement is systematically easier to read than other parts of the chairman’s statement. No evidence was found to support prior research that, rather than present accounting narratives objectively, managers use readability variability to emphasise good news and obfuscate bad news. The thematic structures within the chairman’s statement were investigated to explore whether they were responsible for systematic patterns in the variability of annual report readability. Findings indicate that thematic structure of the chairman’s statement is indeed a key driver of the variability of annual report readability.
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The article presents a novel methodology for measuring the clarity of central bank communication using content analysis, illustrating the methodology with the case of the European Central Bank (ECB). The analysis identifies the ECB's written communication as clear in about 85–95% of instances, which is comparable with, or better than, similar results available for other central banks. We also find that the additional information on risk to inflation and especially projection risk assessment contained in the ECB's Monthly Bulletins helps to improve communication clarity compared to ECB's press releases. In contrast, the bulletin's communication on monetary developments has a negative, albeit small, impact on clarity.
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By applying readability statistics to the Humphrey-Hawkins testimonies given by the Federal Reserve Chairman, it is tested whether the clarity of central bank communication affects volatility in financial markets. There are three results. First, when clarity matters, it has a diminishing effect on volatility. Second, clarity of communication matters mostly for volatility of medium-term interest rates. Third, the effects of clarity vary over time. Clarity mattered especially, but not exclusively during Alan Greenspan's Chairmanship. Overall, the analysis illustrates the importance of transparent communication on monetary policy. (JEL E44, E52, E58)
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We show how most Humphrey-Hawkins testimonies by Paul Volcker and Alan Greenspan were difficult to follow, implying the general public needs information through different, more accessible communications. Still, it is not obvious that Greenspan was increasingly 'mumbling with great incoherence'.
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This paper explains how central bank statements, rather than open market operations, can be used to implement monetary policy. In the extreme, policy instruments can be held constant, and yet interest rates will evolve along the path desired by the central bank. We show how the recent implementation of monetary policy in New Zealand works in this way. Using announcement data from New Zealand, we find that open mouth operations lead to large changes in interest rates across all maturities, and these changes cannot be explained by open market operations. Implications are drawn for monetary policy in other jurisdictions.
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We examine the effects of U.S. target rate changes and FOMC communications on European and Pacific equity market returns and find that both have a significant impact. European markets are influenced by a greater variety of communications than Pacific markets.
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We explain federal funds target rate decisions using macroeconomic variables and Federal Reserve communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 75 target rate decisions between 1998 and 2006. We find, first, that our communication indicators significantly explain target rate decisions and improve explanatory power in and out of sample. Second, speeches by members of the Board of Governors and regional presidents have a statistically significant and equal-sized effect, whereas the less-frequent monetary policy reports and congressional hearings are insignificant. Third, our findings are robust to variations in the specification, including changes in the communication strategy. Finally, our communication indicator based on Federal Reserve speeches performs better in explaining target rate decisions than do newswire reports of Fed communications.
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Central bank transparency has become the topic of a lively public and academic debate on monetary policy. However, this has been complicated by the fact that transparency is a qualitative concept that is hard to measure. This paper proposes an index for the transparency of monetary policy that comprises the political, economic, procedural, policy and operational aspects of central banking. The index is compiled for nine major central banks. It is based on a detailed analysis of actual information disclosure and reveals a rich variety in the degree and dynamics of central bank transparency.
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We propose a test of the null hypothesis that an observable series is stationary around a deterministic trend. The series is expressed as the sum of deterministic trend, random walk, and stationary error, and the test is the LM test of the hypothesis that the random walk has zero variance. The asymptotic distribution of the statistic is derived under the null and under the alternative that the series is difference-stationary. Finite sample size and power are considered in a Monte Carlo experiment. The test is applied to the Nelson-Plosser data, and for many of these series the hypothesis of trend stationarity cannot be rejected.
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Using new data on the term in office of central bank governors for a large set of countries for 1970–2005, we estimate a model for the probability that a central bank governor is replaced before the end of his legal term in office. We formulate hypotheses based on the literature on the determinants of central bank independence that are tested using conditional logit models and the robustness approach of Sala-i-Martin (1997). We conclude that, apart from the share of the legal term in office that has elapsed, political and regime instability, the occurrence of elections, and the ratio of private credit to GDP increase the probability of a turnover.
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Does the general public know what central banks do? Is this kind of knowledge relevant? Using a survey of Dutch households, we investigate these questions for the case of the European Central Bank (ECB). Our findings suggest that knowledge on the ECB’s objectives is far from perfect. Both a weak desire to be informed and unawareness of insufficient knowledge are barriers for improving the public's understanding of monetary policy. However, our results also show that more intensive use of information improves understanding, suggesting that the media channel may play an important and constructive role in building knowledge. Finally, we find that knowledge on monetary policy objectives contributes to an individual’s ability to form realistic inflation expectations.
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The paper assesses the communication strategies of the Federal Reserve, the Bank of England, and the European Central Bank and their effectiveness. We find that the effectiveness of communication is not independent from the decision-making process. The paper shows that the Federal Reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision making, while the Bank of England is using a collegial communication strategy and highly individualistic decision making. The European Central Bank (ECB) has chosen a collegial approach both in its communication and in its decision making. Assessing these strategies, we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the Federal Reserve and the ECB. This suggests that there may not be a single best approach to designing a central bank communication strategy. Copyright 2007 The Ohio State University.
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Paper presented at the Federal Reserve Bank of Kansas City Symposium "The Greenspan Era: Lessons for the Future" - Jackson Hole, Wyoming, August 25-27, 2005.
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This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
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We present a new approach to study empirically the effect of the introduction of the euro on currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice depends on the characteristics of both the currency and the country. We use unique quarterly panel data of Norwegian imports from OECD countries for the 1996-2006 period. One of the key findings is that the eurozone countries in trade with Norway have substantially increased their share of home currency invoicing after the introduction of the euro. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The econometric analysis shows a significant effect of euro introduction above and beyond the determinants of currency invoicing (i.e., inflation rate, inflation volatility, foreign exchange market size, and product composition). However, the rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility.
Article
It is shown that the voting record of the Monetary Policy Committee of the Bank of England helps predict future policy rate changes. This result is robust to the inclusion of market participants' expectations as measured by the slope of the term structure of money market rates and interest rate futures. Moreover, expectations seem to adjust to the information contained in the voting record, which suggests that publishing the minutes of MPC meetings increases the transparency of monetary policy. Copyright The editors of the "Scandinavian Journal of Economics", 2004 .
Monetary policy and central bank communication: complements or substitutes? Comments on Blinder
  • B M Friedman
Content analysis for the social sciences and humanities
  • O R Holsti
  • OR Holsti
Central bank communication on financial stability
  • B Born
  • M Ehrmann
  • M Fratzcher