Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence

Abstract

Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication—mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank’s toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks’ macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy.

Economic uncertainty and its impact on the Croatian economy

“…Recession for sure cannot be avoided by mere timely communication of the economic policy measures to the public (consumers, firms, banks), but the effects of a crisis can probably be held under control to a certain extent. The necessity of sound communication of the planned policy moves was recognized as a conditio sine qua non of efficient economic policy a long time ago (Kramer et al, 2008). On the other hand, recent domestic trends such as the then government's refusal to face the evident crisis in November 2008 (Jutarnji list, 2015) give an example of the negative effect of uncertainty due to inadequate communication.…”

The high-frequency response of exchange rates to monetary policy actions and statements

“…The role of central bank communication for the conduct of monetary policy-making has recently received increasing attention in the academic literature both theoretically and empirically (see Blinder et al (2008) for more details). In this respect, Gurkaynak et al (2005) use changes in money market rates to construct multi-dimensional indicators of monetary policy news, capturing both central bank communication and monetary policy decisions.…”

Optimal linear contracts under common agency and uncertain central bank preferences

“…Dincer and Eichengreen (2007) show that the average transparency index remains much higher in developed economies. 13 According to Blinder et al (2008), the Reserve Bank of New Zealand and the Bank of England were the first to move towards greater transparency, the Central Banks of Norway and of Sweden are now in the vanguard and the ECB has always been more transparent than the Fed. Blinder et al (2008) conclude their vast survey by suggesting that no consensus has emerged on the communication policies that should represent "best practice" for central banks.…”

“…13 According to Blinder et al (2008), the Reserve Bank of New Zealand and the Bank of England were the first to move towards greater transparency, the Central Banks of Norway and of Sweden are now in the vanguard and the ECB has always been more transparent than the Fed. Blinder et al (2008) conclude their vast survey by suggesting that no consensus has emerged on the communication policies that should represent "best practice" for central banks. Geraats (2009) documents that the most transparent central banks in the Dincer and Eichengreen (2007) sample are New Zealand, Sweden, the United Kingdom, Canada and the Czech Republic; more generally, inflation targeters are on average the most transparent, followed by central banks without a precise targeting framework (e.g., ECB, India, Japan, Russia and the United States); monetary targeters (e.g., Argentina and Indonesia) and exchange rate targeters (e.g., mainland China and Hong Kong) are the least transparent.…”