Central Bank Communication, Decision Making, and Governance

Central Bank Communication, Decision Making, and Governance: Issues, Challenges, and Case Studies

Pierre L. Siklos
Jan-Egbert Sturm
Copyright Date: 2013
Published by: MIT Press
Pages: 328
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  • Book Info
    Central Bank Communication, Decision Making, and Governance
    Book Description:

    In recent years central bankers have placed new emphasis on communication with financial markets and the general public. They have done this not only through the traditional channel of monetary policy pronouncements but also by increasing the quantity of information they make public. Yet as central banks strive to provide more and clearer information about the outlook for the economy, they must balance their capacity to steer economic expectations with their natural caution about committing to future monetary policy paths. This volume offers a variety of perspectives on the economic implications of increased central bank communication. Contributors offer theoretical analyses of the effect of central bank communication on the general macroeconomic environment; consider a variety of novel empirical approaches to the issue; and analyze communication, decision making, and governance practices of the Greenspan-era U.S. Federal Reserve, the fledgling European Central Bank, and a variety of smaller central banks, including those of the Czech Republic, Sweden, England, and New Zealand.Contributors:Helge Berger, Michelle Bligh, Marianna Blix-Grimaldi, Aleš Bulír, Robert Chirinko, Martin Cihák, Christopher Curran, Paul De Grauwe, Jakob de Haan, Michael Ehrmann, Marcel Fratzscher, Petra Geraats, Gregory Hess, Roman Horváth, David-Jan Jansen, Özer Karagedikli, Michael Lamla, David Mayes, Alberto Montagnoli, Pierre L. Siklos, Katerina Šmídková, Jan-Egbert Sturm, Jan Zápal

    eISBN: 978-0-262-31400-8
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)

    This book is part of the CESifo Seminar Series. The series aims to cover topical policy issues in economics from a largely European perspective. The books in this series are the products of the papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at Ludwig-Maximilians-Universität, Munich, and the Ifo Institute for Economic Research. All publications in this series have been carefully selected and refereed by members of the CESifo research network....

  4. 1 Introduction and Overview
    (pp. 1-22)
    Pierre L. Siklos and Jan-Egbert Sturm

    Central bankers have for some time now understood and emphasized the importance of communication. They have expanded communication not only through the age-old practice of giving more speeches but also by greatly increasing the volume of information provided to the public. The result, as documented by Dincer and Eichengreen (2008, 2009) and Siklos (2011),¹ among others, has been a sharp rise in central bank transparency. This is not surprising as the worldwide movement toward greater central bank independence, which gathered pace during the 1990s, was met by the monetary authorities’ recognition that with greater responsibilities comes greater accountability.

    Of course,...

  5. I Central Bank Communication:: Some Theoretical Considerations
    • 2 Central Bank Communication When Agents Experience Cognitive Limitations
      (pp. 25-48)
      Paul De Grauwe

      Academic discussions of the value of communication by central banks have been greatly influenced by the theory of inflation targeting as developed by Svensson (1997), Bernanke and Mishkin (1997), and Woodford (2003), among others. Inflation targeting as conceived by these authors implies transparency, i.e., a willingness of the central bank to communicate as much information as possible, including its own forecasts of the rate of inflation. Under the influence of the “inflation-targeting revolution,” central banks have opened up their boardrooms and have provided vastly more information than they used to do. It is not an exaggeration to say that the...

    • 3 Transparency, Flexibility, and Macroeconomic Stabilization
      (pp. 49-82)
      Petra M. Geraats

      There has been a remarkable rise in the transparency of monetary policy during the last two decades. A majority of central banks throughout the world nowadays regularly publish their macroeconomic forecasts. This paper shows that such transparency gives the central bank greater flexibility to offset macroeconomic disturbances. In contrast, opacity forces the central bank to limit the stabilization of macroeconomic shocks to prevent upsetting the private sector’s inflation expectations. Thus, an opaque central bank mutes its interest rate response and no longer fully offsets aggregate demand shocks it anticipates. As a result, greater transparency about macroeconomic forecasts leads to more...

  6. II Empirical Methods in Central Bank Communication Research
    • 4 Central Bank Communication and Financial Stress
      (pp. 85-100)
      Marianna Blix Grimaldi

      In this chapter we exploit the information contained in central bank communication to measure the level of stress in financial markets. Communication from central banks is not only a matter of giving out information on key rates but has increasingly become one of the banks’ key instruments for managing market expectations about future policy rates. Notably, any information that gives forward guidance is scrutinized by the markets.

      One implication is that central bank communication has become much more multidimensional—and is aimed at the markets, the public, and sometimes also politicians and governments. Minutes, speeches, and other publications contain a...

    • 5 Interest Rate Expectations in the Media and Central Bank Communication
      (pp. 101-112)
      Michael J. Lamla and Jan-Egbert Sturm

      Market participants use interest rate decisions as well as communications of the central bank to infer the future path of monetary policy. In chapter 13 of this volume, Karagedikli and Siklos estimate the impact of central bank written statements and interest rate announcements on the New Zealand–US dollar and the New Zealand–Australian dollar exchange rates, and in chapter 8 Chirinko and Curran investigate the transmission of formal pronouncements of US Fed officials on Treasury bond futures. Other studies, like Ehrmann and Fratzscher (2009) and Brand, Buncic, and Turunen (2006), also explore the importance of the press conference relative...

    • 6 Extreme Views Make News
      (pp. 113-120)
      Helge Berger, Michael Ehrmann and Marcel Fratzscher

      Economists have long embraced the notion that the processing of information and the production of news is best understood as an outcome of market mechanisms (e.g., Coase 1974). News can be characterized as public goods, as experience goods, or as a product with multiple dimensions, and its production process is best described as one of high fixed costs and low variable costs. Hamilton (2004) shows that these market features can explain the positioning of news outlets in their coverage of soft and hard news. And George and Waldfogel (2003) show that high fixed costs and heterogeneous product preferences among consumers...

  7. III The Fed’s Experience
    • 7 Deconstructing Alan: A Quantitative Assessment of the Qualitative Aspects of Chairman Greenspan’s Communication
      (pp. 123-148)
      Michelle Bligh and Gregory Hess

      There can be no doubt that for a considerable period of time the Federal Open Market Committee (FOMC) has articulated its message at a measured pace.¹ This has not always been the case. Indeed, for much of its history the FOMC has been largely uncommunicative, preferring to surround itself with mystery as it has implemented monetary policy.

      Alan Greenspan’s tenure as the chairman of the Federal Reserve Board is associated with a fundamental change in the practice of both the conduct and communication of US monetary policy. Historically, transparency had not been high on any monetary authority’s list of priorities....

    • 8 Greenspan Shrugs: Central Bank Communication, Formal Pronouncements, and Bond Market Volatility
      (pp. 149-180)
      Robert S. Chirinko and Christopher Curran

      There is a broad consensus among central bankers and monetary policy scholars that transparency enhances economic performance. Expectations about the future course of the economy have a substantial impact on economic decisions, and monetary policy has a substantial role in influencing these expectations.¹ The lifting of the veil on central banking operations lowers the level of uncertainty confronting firms, households, and investors, and thus enhances incentives for risk-averse agents to undertake long-term commitments. A more transparent monetary policy informs and anchors expectations. With fewer monetary surprises, economic activity becomes less volatile. Moreover, transparency is consistent with the democratic principles of...

  8. IV The ECB’s Experience
    • 9 An Assessment of the Consistency of ECB Communication
      (pp. 183-202)
      David-Jan Jansen and Jakob de Haan

      Over the past two decades, communication has become an important instrument for monetary policymakers. In line with this development, there has been a surge in empirical studies on central bank communication (Blinder et al. 2008). Many of these studies refer to the communication policy of the European Central Bank (ECB). There is substantive evidence that ECB communications move financial markets in the intended direction (see, for instance, Ehrmann and Fratzscher 2007). Likewise, there are clear indications that ECB communications increase the predictability of interest decisions (see, for instance, Sturm and De Haan 2011).

      Still, especially during the ECB’s first years...

    • 10 Are You Clear Now? The ECB’s Written Communication on Monetary Policy
      (pp. 203-228)
      Aleš Bulíř, Martin Čihák and Kateřina Šmídková

      This paper presents a novel approach to measuring the clarity of monetary policy messages, using the European Central Bank (ECB) as an example. The dramatic increase in monetary policy communication in the past two decades or so has been justified by benefits of policy transparency (Geraats 2002; Čihák 2007; Geraats, Giavazzi, and Wyplosz 2008). Most of the empirical literature on central bank communication has focused either on quantitative measures of monetary policy transparency (such as the volume of information provided) or on short-term effects of central bank announcements (for instance, on market prices and spreads), with much less attention paid...

  9. V The International Experience
    • 11 Uncertainty and Monetary Policy
      (pp. 231-250)
      David Mayes and Alberto Montagnoli

      There has been growing interest in uncertainty in monetary policymaking, and in the communication of monetary policy. There are many sides to the problem, starting simply with the fact that the future is uncertain. Also central banks in particular (notably the ECB, the Bank of England, and the US Federal Reserve) have sponsored research into model uncertainty.¹ Attention has also been paid to the uncertainty faced by markets, to which central banks can contribute by erratic or unclear decision making. This has raised the importance of transparency on the part of the central bank (e.g., Eusepi 2005). The main conclusion...

    • 12 Voting Record and Monetary Policy Predictability: Evidence on Six Central Banks
      (pp. 251-272)
      Roman Horváth, Kateřina Šmídková and Jan Zápal

      On the most general level the question of whether voting records of central bank boards and monetary policy committees (MPCs) reveal information about future changes in monetary policy is related to the literature on central bank communication and central bank transparency surveyed by Blinder et al. (2008) and Geraats (2002 , and in this volume) respectively. The general conclusion of both strands of the literature is that the way central banks communicate to the public and the degree of their transparency matter for monetary policy. Most of the theoretical and empirical studies also indicate the benefits of more open and...

    • 13 A Bridge Too Far? RBNZ Communication, the Forward Interest Rate Track, and the Exchange Rate
      (pp. 273-310)
      Özer Karagedikli and Pierre L. Siklos

      The Reserve Bank of New Zealand (RBNZ) began relying on an overnight lending rate as the instrument of monetary policy in March 1999. Moreover, until 2007, the RBNZ had not intervened in foreign exchange markets since 1985. Since 1999, as shown in figure 13.1, there have been large movements in foreign exchange rate levels of the New Zealand dollar (NZD), measured either in Australian (AUD) or US dollar (USD) terms. Changes in the official cash rate (OCR), the formal name given to the RBNZ’s instrument of monetary policy,¹ represent one of several means the central bank has at its disposal...

  10. Contributors
    (pp. 311-312)
  11. Index
    (pp. 313-318)