Advertisement

Central Banks’ Communication Strategies: Just Words?

  • Vincenzo Farina
  • Giuseppe Galloppo
  • Daniele A. PreviatiEmail author
Chapter
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)

Abstract

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.

Keywords

Central bank communication Glossary Communication effectiveness Communication strategies Scenario analysis Central bank communication 

References

  1. Antweiler, W., & Murray, Z. F. (2004). Is all that talk just noise? The information content of internet stock message boards. Journal of Finance, 59, 1259–1293.CrossRefGoogle Scholar
  2. Apel, M., & Blix Grimaldi, M. (2012). The information content of central bank minutes. Working Paper Series 261, Sveriges Riksbank (Central Bank of Sweden).Google Scholar
  3. Berger, H., De Haan, J., & Sturm, J.-E. (2006). Does money matter in the ECB strategy? New evidence based on ECB communication. CESifo Working Paper 1652.Google Scholar
  4. Blinder, A. S. (1998). Central banking in theory and practice. Cambridge, MA: MIT Press.Google Scholar
  5. Blinder, A. S., Ehrmann, M., Fratzscher, M., De Haan, J., & Jansen, D. J. (2008). Central bank communication and monetary policy: A survey of theory and evidence. Journal of Economic Literature, 46(4), 910–945.CrossRefGoogle Scholar
  6. Born, B., Ehrmann, M., & Fratzscher, M.. (2010). Macroprudential policy and central bank communication. BIS Papers No 60.Google Scholar
  7. Born, B., Ehrmann, M., & Fratzscher, M. (2014). Central bank communication on financial stability. The Economic Journal, 124(577), 701–734.CrossRefGoogle Scholar
  8. Brunner, K. (1981). The art of central banking. Center for Research in Government Policy and Business, University of Rochester, Working Paper GPB 81-6.Google Scholar
  9. 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.Google Scholar
  10. Bulíř, A., Čihák, M., & Jansen, D.-J. (2013). What drives clarity of central bank communication about inflation? Open Economies Review, 24(1), 125–145.CrossRefGoogle Scholar
  11. Carretta, A., Farina, V., Fiordelisi, F., Schwizer, P., & Stentella, F. S. (2015). Don’t stand so close to me: The role of supervisory style on banking stability. Journal of Banking and Finance, 52, 180–188.CrossRefGoogle Scholar
  12. Dincer, N., & Eichengreen, B. (2007). Central bank transparency: Causes, consequences and updates. National Bureau of Economic Research, Working Paper No. 14791.Google Scholar
  13. Ehrmann, M., & Fratzscher, M. (2007). Communication by central bank committee members: Different strategies, same effectiveness? Journal of Money, Credit, and Banking, 39(2–3), 509–541.CrossRefGoogle Scholar
  14. Ehrmann, M., & Fratzscher, M. (2009). Explaining monetary policy in press conferences. International Journal of Central Banking, 5, 41–84.Google Scholar
  15. Eijffinger, S. C. W., & Geraats, P. M. (2006). How transparent are central banks? European Journal of Political Economy, 22(1), 1–21.CrossRefGoogle Scholar
  16. Fligstein, N., Brundage, J. S., & Schultz, M. (2014). Why the federal reserve failed to see the financial crisis of 2008: The role of “macroeconomics” as a sense making and cultural frame. IRLE Working Paper No. 111-14.Google Scholar
  17. Geraats, P. (2002). Central bank transparency. Economic Journal, 112(483), F532–F565.CrossRefGoogle Scholar
  18. Gerlach, S. (2007). Interest rate setting by the ECB, 1999–2006: Words and deeds. International Journal of Central Banking, 3(3), 1–46.Google Scholar
  19. Hansen, S., & McMahon, M. (2016). Shocking language: Understanding the macroeconomic effects of central bank communication. Journal of International Economics, 99, S114–S133.CrossRefGoogle Scholar
  20. Hansen, S., McMahon, M., & Prat, A. (2014). Transparency and deliberation within the FOMC: A computational linguistics approach. CFM discussion paper series, CFM-DP2014-11. Centre For Macroeconomics, London, UK.Google Scholar
  21. Hansen, S., McMahon, M., & Prat, A. (2017). Transparency and deliberation within the FOMC: A computational linguistics approach. The Quarterly Journal of Economics, 133(2), 801–870.CrossRefGoogle Scholar
  22. Hayo, B., Kutan, A., & Neuenkirch, M. (2010). The impact of U.S. central bank communication on European and Pacific equity market. Economics Letters, 108(2), 172–174.CrossRefGoogle Scholar
  23. Heinemann, F., & Ullrich, K. (2007). Does it pay to watch central bankers lips? The information content of ECB wording. Swiss Journal of Economics and Statistics, 3, 155–185.CrossRefGoogle Scholar
  24. Hendry, S. (2012). Central bank communication or the media’s interpretation: What moves markets? Working Papers 12-9, Bank of Canada.Google Scholar
  25. Hendry, S., & Madeley, A. (2010). Text mining and the information content of Bank of Canada communications. Working Papers 10-31, Bank of Canada.Google Scholar
  26. Hernandez-Murillo, R., & Shell, H. (2014). The rising complexity of the FOMC statement. Economic Synopses, 23.Google Scholar
  27. Issing, O. (2005). Communication, transparency, accountability: Monetary policy in the twenty-first century. Federal Reserve Bank of St. Louis Review, 87(2), 65–83.Google Scholar
  28. Jansen, D. J., & de Haan, J. (2005). Talking heads: The effects of ECB statements on the Euro-Dollar exchange rate. Journal of International Money and Finance, 24(2), 343–361.CrossRefGoogle Scholar
  29. Jansen, D.-J., & de Haan, J. (2009). Has ECB communication been helpful in predicting interest rate decisions? An evaluation of the early years of the Economic and Monetary Union. Applied Economics, 41, 1995–2003.CrossRefGoogle Scholar
  30. Knütter, R., Mohr, B., & Wagner, H. (2011). The effects of central bank communication on financial stability: A systematization of the empirical evidence. Fernuniv.Google Scholar
  31. Loughran, T., & McDonald, B. (2011). When is a liability not a liability? Textual analysis, dictionaries, and 10-Ks. Journal of Finance, 66(1), 35–65.CrossRefGoogle Scholar
  32. Loughran, T., & McDonald, B. (2014). Measuring readability in financial disclosures. Journal of Finance, 69, 1643–1671.CrossRefGoogle Scholar
  33. Morris, S., & Shin, H. S. (2002). Communication and monetary policy. Oxford Review of Economic Policy, 18(4), 495–503.CrossRefGoogle Scholar
  34. Musard-Gies, M. (2006). Do ECB’s statements steer short-term and long-term interest rates in the Euro-zone? The Manchester School, 74(supplement), 116–139.CrossRefGoogle Scholar
  35. Nelson, D. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59, 347–370.CrossRefGoogle Scholar
  36. Reis, R. (2013). Central bank design. Journal of Economic Perspectives, 27(4), 17–44.CrossRefGoogle Scholar
  37. Rosa, C., & Verga, G. (2007). On the consistency and effectiveness of central bank communication: Evidence from the ECB. European Journal of Political Economy, 23(1), 146–175.CrossRefGoogle Scholar
  38. Rosa, C., & Verga, G. (2008). The impact of central bank announcements on asset prices in real time. International Journal of Central Banking, 4(2), 175–217.Google Scholar
  39. Rozkrut, M., Rybiński, K., Sztaba, L., & Szwaja, R. (2007). Quest for central bank communication: Does it pay to be “talkative”? European Journal of Political Economy, 23(1), 176–206.CrossRefGoogle Scholar
  40. Stone, J. R. N. (1966). The social accounts from a consumer’s point of view. An outline and discussion of the revised United Nations system of national accounts. Review of Income and Wealth, 12(1), 1–33.CrossRefGoogle Scholar
  41. Sturm, J.-E., & De Haan, J. (2011). Does central bank communication really lead to better forecasts of policy decisions? New evidence based on a Taylor rule model for the ECB. Review of World Economics, 147.1, 41–58.CrossRefGoogle Scholar
  42. Tausczik, Y. R., & Pennebaker, J. W. (2010). The psychological meaning of words: LIWC and computerized text analysis methods. Journal of Language and Social Psychology, 29, 24–54.CrossRefGoogle Scholar
  43. Tetlock, P. C. (2007). Giving content to investor sentiment: The role of media in the stock market. Journal of Finance, 62(3), 1139–1168.CrossRefGoogle Scholar
  44. Tetlock, P. C., Saar-Tsechansky, M., & Macskassey, S. (2008). More than words: Quantifying language to measure firms’ fundamentals. Journal of Finance, 63, 1437–1467.CrossRefGoogle Scholar
  45. Winkler, B. (2000). Which kind of transparency? On the need for clarity in monetary policy-making. European Central Bank working paper no. 26.Google Scholar
  46. Woodford, M. (2001). Monetary policy in the information economy. In Economic policy for the information economy (pp. 297–370). Kansas City: Federal Reserve Bank of Kansas City.Google Scholar
  47. Woodford, M. (2005). Central bank communication and policy effectiveness. National Bureau of Economic Research, Working Paper No. 11898.Google Scholar

Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Vincenzo Farina
    • 1
  • Giuseppe Galloppo
    • 2
    • 3
  • Daniele A. Previati
    • 4
    Email author
  1. 1.Department of Management and LawUniversity of Rome Tor VergataRomeItaly
  2. 2.Department of Economics and BusinessUniversity of TusciaViterboItaly
  3. 3.Ceis FoundationUniversity of Rome Tor VergataRomeItaly
  4. 4.Department of Business StudiesUniversity Roma TreRomeItaly

Personalised recommendations