Skip to main content

What Drives Clarity of Central Bank Communication About Inflation?

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.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2

Notes

  1. See Blinder et al. (2008) for a discussion of the literature up to 2008. Recent contributions on communication to financial markets include Brand et al. (2010), Hayo et al. (2010), Neuenkirch (2012), and Rosa (2011). Van der Cruijsen et al. (2010) study communication to the general public using a survey of Dutch households.

  2. The literature has widely discussed whether communication is a complement to or a substitute for interest rate policy. See, inter alia, Kohn (2008), Woodford (2005) or Friedman (2008) for various positions in this debate.

  3. The term “country”, as used in this paper, may include also territorial entities that are not countries, but for which separate economic statistics are produced.

  4. There is an analogy with a debate in the accounting literature that focuses on analyzing readability of corporations’ annual reports. For instance, Courtis (1998) finds some evidence that, rather than present accounting narratives objectively, managers use readability variability to emphasize good news and obfuscate bad news. However, other studies suggest that there is no such temporary variation (Clatworthy and Jones 2001).

  5. First, each verbal comment was catalogued into a major category and several subcategories: demand (fiscal, domestic cycle pressure, wages, external demand, domestic asset price bubbles, other), supply (weather and similar shocks, oil/gas prices, agricultural prices, capacity utilization, labor supply, regulated prices, structural changes, retail competition, indirect taxes, other), or external (exchange rates, global financial shocks, other). Second, factors putting upward/downward pressure on inflation were denoted as +1/−1 and neutral factors were denoted as 0. Below are some examples of our coding using the ECB’s Monthly Bulletins. The January 2003 issue contained the following sentence: “the current subdued pace of economic growth should contain inflationary pressures” and was coded as −1 in the demand category. The January 2003 bulletin noted “various increases in administered prices,” and was coded as +1 in the supply category.

  6. In addition to its objective nature, other reasons for choosing the Flesch–Kincaid measure include its convenience (the Flesch–Kincaid system is embedded in Microsoft Word), wide use in studies of readability, repeatability, and excellent comparability with other established readability scales, such as the fog index and the automated readability index. For instance, Kincaid and others (1975) have reported correlation coefficients of about 0.9 vis-à-vis alternative measures.

  7. In the interest of full disclosure, the FK grade level of our paper is 14.3 years.

  8. In the case of the ECB, communication is issued simultaneously in all member languages.

  9. The staff of the Czech National Bank provided further anecdotal evidence: virtually all questions and comments with respect to the CNB inflation reports have been written either in English or referred to the English version of the documents.

  10. Results for the KPSS-tests are available upon request.

  11. The front-page footnote in the English-language Chilean reports explicitly states the seniority of the Spanish original: “This is a translation of a document originally written in Spanish. In case of discrepancy or difference in interpretation the Spanish original prevails.” Central bank reports in other countries contain similar disclaimers.

  12. Jansen (2011a) also stresses that readability measures should be carefully interpreted.

  13. Our use of the FK grade level to approximate changes in clarity of communication does not mean that central banks necessarily actively use this particular readability measure in polishing their external communications. That said, much of the research on clarity of central bank communication is (co)authored by central bank staff, so this is an area of some interest. Perhaps more importantly, central banks employ professional editors and communication experts, underscoring the importance they attach to properly calibrating their external communications.

  14. Information on inflation targets and their changes was taken from the central bank documents or websites. Generally, inflation targets do not tend to change often, but our sample does contain some changes in inflation targets, which are reflected in the calculations. For example, in December 2003, the Bank of England’s target changed from 2.5 % retail price index (RPIX) inflation to 2 % inflation in the Consumer Price Index (CPI). Also, Chile, the Czech Republic, and Poland had declining inflation targets during the first few years of the sample. Data on the targeted inflation series, usually headline inflation based on either harmonized index of consumer prices (HICP) or regular index of consumer prices CPI indices, were taken from Haver Analytics.

  15. The construction of inflation forecasts differs across central banks. For example, the CNB’s forecast is fully endogenous, while BOE and ECB forecasts are, nowadays, conditional on market expectations. Other things equal, the CNB’s ex ante one-year inflation gap will likely be smaller than the BOE’s one: the policy rule, coupled with model-consistent expectations, ensures that the inflation forecast is at the target in a horizon of about 2 years. In our context, however, this is not a major issue. We are not focusing on cross-country comparisons, but rather on comparisons within a country, and the construction of inflation forecasts for our sample countries has been reasonably consistent.

  16. Research on financial stability communication is still scarce. For two recent contributions, see Born et al. (2011) and Čihák et al. (2012).

References

  • Blinder AS (2009) Talking about monetary policy: the virtues (and vices?) of central bank communication. BIS Working paper no. 274. (Basel: Bank for International Settlements). http://www.bis.org/publ/work274.htm

  • Blinder AS, Ehrmann M, Fratzscher M, De Haan J, Jansen D (2008) Central bank communication and monetary policy: a survey of theory and evidence. J Econ Lit 46:910–945

    Article  Google Scholar 

  • Born B, Ehrmann M, Fratzcher M (2011) Central bank communication on financial stability. ECB Working Paper 1332. (Frankfurt: European Central Bank). http://www.ecb.int/pub/pdf/scpwps/ecbwp1332.pdf

  • Brand C, Buncic D, Turunen J (2010) The impact of ECB monetary policy decisions and communication on the yield curve. J Eur Econ Assoc 8:1266–1298

    Article  Google Scholar 

  • Bulíř A, Čihák M, Šmídková K (forthcoming) Writing clearly: the ECB’s monetary policy communication. Ger Econ Rev. doi:10.1111/j.1468-0475.2011.00562.x

  • Bulíř A, Šmídková K, Kotlán V, Navrátil D (2008) Inflation targeting and communication: it pays off to read inflation reports. IMF Working Paper 08/234. (Washington, DC: International Monetary Fund). http://www.imf.org/external/pubs/ft/wp/2008/wp08234.pdf

  • Čihák M, Muñoz S, Sharifuddin ST, Tintchev K (2012) Financial stability reports: what are they good for? IMF Working Paper 12/1. (Washington, DC: International Monetary Fund). http://www.imf.org/external/pubs/ft/wp/2012/wp1201.pdf

  • Clatworthy M, Jones M (2001) The effect of thematic structure on the variability of annual report readability. Account Audit Account J 14:311–326

    Article  Google Scholar 

  • Courtis JK (1998) Annual report readability variability: tests of the obfuscation hypothesis. Account Audit Account J 11:459–471

    Article  Google Scholar 

  • Dincer N, Eichengreen B (2007) Central bank transparency: causes, consequences and updates. National Bureau of Economic Research, Working Paper No. 14791

  • Dreher A, Sturm J-E, De Haan J (2010) When is a central bank governor replaced? Evidence based on a new data set. J Macro 32:766–781

    Article  Google Scholar 

  • Ehrmann M, Fratzscher M (2007) Communication by central bank committee members: different strategies, same effectiveness? J Money, Credit, Bank 39:509–541

    Article  Google Scholar 

  • Eijffinger SCW, Geraats PM (2006) How transparent are central banks? Eur J Pol Econ 22:1–21

    Article  Google Scholar 

  • Fracasso A, Genberg H, Wyplosz C (2003) How do central banks write? Geneva Reports on the World Economy, Special Report 2. (Geneva: The Center for Economic Policy Research). http://hei.unige.ch/~wyplosz/IR_fgw.pdf

  • Friedman BM (2008) Monetary policy and central bank communication: complements or substitutes? Comments on Blinder et al. (2008) http://www.bis.org/events/conf080626/friedman.pdf

  • Gerlach-Kristen P (2004) Is the MPC’s voting record informative about future UK monetary policy? Scand J Econ 106:299–313

    Article  Google Scholar 

  • Guthrie G, Wright J (2000) Open mouth operations. J Monetary Econ 46:489–516

    Google Scholar 

  • Hayo B, Neuenkirch M (2010) Do Federal Reserve communications help predict federal funds target rate decisions? J Macroecon 32:1014–1024

    Article  Google Scholar 

  • Hayo B, Kutan A, Neuenkirch M (2010) The impact of U.S. central bank communication on European and Pacific equity market. Econ Lett 108:172–174

    Article  Google Scholar 

  • Holsti OR (1969) Content analysis for the social sciences and humanities. Addison-Wesley, Reading

    Google Scholar 

  • Jansen D (2011a) Mumbling with great incoherence: was is really so difficult to understand Alan Greenspan? Econ Lett 113:70–72

    Article  Google Scholar 

  • Jansen D (2011b) Has the clarity of central bank communication affected financial markets? Evidence from Humphrey-Hawkins testimonies. Cont Econ Pol 29:494–509

    Article  Google Scholar 

  • Kincaid JP, Fishburne RP, Rogers RL, Chissom BS (1975) Derivation of new readability formulas (Automated Readability Index, Fog Count, and Flesch Reading Ease Formula) for Navy enlisted personnel. Research Branch report 8–75. Naval Air Station, Memphis

    Google Scholar 

  • Kohn DL (2008) Recent and prospective developments in monetary policy transparency and communications: a global perspective. Speech at the 2008 ASSA Meetings. http://www.federalreserve.gov/newsevents/speech/kohn20080105a.htm

  • Krippendorf K (2004) Content analysis: an introduction to its methodology, 2nd edn. Sage, Thousand Oaks

    Google Scholar 

  • Kwiatkowski D, Phillips PCB, Schmidt P, Shin Y (1992) Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? J Econom 54:159–178

    Article  Google Scholar 

  • Neuenkirch M (2012) Managing financial market expectations: the role of central bank transparency and central bank communication. Eur J Pol Econ 28:1–13

    Article  Google Scholar 

  • Paasche-Orlow M, Taylor H, Brancati F (2003) Readability standards for informed-consent forms as compared with actual readability. N Engl J Med 348:721–726

    Article  Google Scholar 

  • Rosa C (2011) Talking less and moving the market more: evidence from the ECB and the Fed. Scott J Pol Econ 58:51–81

    Article  Google Scholar 

  • Rosa C, Verga V (2007) On the consistency and effectiveness of central bank communication: evidence from the ECB. Eur J Pol Econ 23:145–175

    Google Scholar 

  • Van der Cruijsen CAB, Jansen D, De Haan J (2010) How much does the public know about the ECB’s monetary policy? Evidence from a survey of Dutch households. European Central Bank, Working Paper No. 1265. http://www.dnb.nl/binaries/Working%20paper%20252_tcm46-236503.pdf

  • Woodford M (2005) Central bank communication and policy effectiveness. National Bureau of Economic Research, Working Paper No. 11898

Download references

Acknowledgments

We thank Michael Ehrmann, Jakob de Haan, Helge Berger, Caroline Silverman, Nico Valckx, Zdeněk Tůma, Tomáš Holub, and participants in the 16th Annual International Conference at the University of Crete and in seminars at the International Monetary Fund, the Czech National Bank, and De Nederlandsche Bank for useful suggestions and discussions. The paper also greatly benefited from comments by two anonymous referees. Jansen thanks the IMF Institute for hospitality during his stay as visiting scholar. Research assistance by Kazim Kazimov and Caroline Silverman is gratefully acknowledged. Views expressed in the paper do not necessarily coincide with those of the IMF, the World Bank, the Eurosystem, de Nederlandsche Bank, or the Czech National Bank.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Aleš Bulíř.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Bulíř, A., Čihák, M. & Jansen, DJ. What Drives Clarity of Central Bank Communication About Inflation?. Open Econ Rev 24, 125–145 (2013). https://doi.org/10.1007/s11079-012-9259-z

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11079-012-9259-z

Keywords

  • Monetary policy
  • Communication
  • Inflation
  • Clarity
  • Transparency

JEL Classification

  • E52
  • E58