Communication of Monetary Policy in Unconventional Times

Abstract

Monetary policy communication is particularly important during unconventional times, because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank's toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state-contingent or when it provides guidance about a long horizon than when it is open-ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme. Non-technical summaryCommunication can help making central banks transparent and thereby contribute to their accountability and to the management of expectations of economic agents. While these roles are generally important, they become even more relevant in unconventional times, when central banks need to explain the rationale and the workings of the various new policy tools that they employ, when the public will want to understand how the central bank will use the new tools, and how the central bank will eventually want to exit from using these tools. Managing expectations of economic agents about the future course of monetary policy is therefore essential in such circumstances, also because under a situation of elevated uncertainty, the central bank should strive to minimize any uncertainty about its own behaviour, to the extent possible.Looking back at several years of experience with unconventional monetary policies in several economies, this paper provides an assessment of the effects and effectiveness of central bank communication during unconventional times. The focus of the paper is on the role of clarity in central bank communication, both when it comes to announcing new policy tools and when using forward guidance. The paper shows that communication about new policy tools reduces market uncertainty in particular when the announcements provide information about the envisaged size of a programme. With regard to forward guidance, clarity can be achieved by stressing the statedependency of the central bank's reaction function. In line with this reasoning, the paper shows that forward guidance is more effective in managing expectations when it is state-contingent or when it provides guidance about a long horizon than when it is open-ended or covers only a short horizon. In addition, the credibility of forward guidance seems to be considerably enhanced if the central bank simultaneously has an asset purchase programme in place.The findings of this paper have implications for monetary policy communicatio...

Analysing Monetary Policy Statements of the Reserve Bank of India

“…Several studies have claimed that clarity of communication assumes material importance particularly during downturns or poor macroeconomic environments (see, for example, Coenen et al, 2017;Smales and Apergis, 2017;Hayo et al, 2015). We augment our 25 Additional analysis not reported here shows that the observed effects of monetary policy complexity on market volatility do not persist for long, in line with much of the literature.…”

State-Dependent Forward Guidance and the Problem of Inconsistent Announcements

“…Feroli et al (2017) also highlight the fact that time-based FG should be used in only very unusual circumstances. Coenen and Ehrmann (2017) find that FG reduces uncertainty more effectively when it is state-dependent (or when it provides guidance about a long horizon). Boneva et al (2018) show that, with the appropriate choice of thresholds, state-dependent FG outperforms timedependent FG.…”

“…() also highlight the fact that time‐based FG should be used in only very unusual circumstances. Coenen and Ehrmann () find that FG reduces uncertainty more effectively when it is state‐dependent (or when it provides guidance about a long horizon). Boneva et al .…”

The role of ECB communication in guiding markets

“…Consequently, we define the surprise component of the monetary policy decision by the change in the Euribor future rate between the end of the ECB governing council meeting day and the end of the previous day. 14 In order to control for the market reaction to the US jobless claims published each Thursday, we use the relative difference between the actual claims and the median expected claims polled by Reuters on the previous Monday as a surprise indicator (Coenen et al, 2017). Hence, a positive surprise means that there were more claims than previously expected.…”

“…Some measure communication by interpreting the tone of inter-meeting speeches (Ehrmann and Fratzscher, 2007), others quantify the frequency of future verbs in the first section of the introductory statement (Galardo and Guerrieri, 2017). Coenen et al (2017) consider the length of the introductory statement and a language complexity index and classify different types of forward guidance and APP announcements to estimate their individual effects. Other strategies include the use of money market data to build communication indicators (Brand et al, 2010).…”