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...
This paper deals with the evolution of the realized volatility of the overnight interest rates in the Euro area money market using intraday data. It analyses in particular the pattern of the volatility of the overnight interest rate before and after the introduction of the structural changes to the Eurosystem's operational framework in March 2004. Using univariate and multivariate regressions, the results suggest that the level of the volatility of the overnight interest rate has significantly decreased after March 2004, whereas the sensitivity of the overnight interest rate has increased, especially over the last days of the reserve maintenance periods. Moreover, there is no evidence according to which the volatility of the overnight interest rate is transmitted to the volatility of money market interest rates at longer maturities. Copyright © 2007 John Wiley & Sons, Ltd.
In this paper the probability of informed trading (PIN) model developed by Easley and O'Hara is applied to analyse the role and impact of heterogeneities in the euro overnight unsecured market. The empirical assessment of the functioning of this market is based on the PIN that measures the ability of traders to interpret signals on the expected evolution of the overnight rate. Results show that between 2000 and 2004 a heterogeneous learning process of market mechanisms within participants could be observed, whereas such asymmetries have been sharply decreasing since 2005. This is reviewed against some significant events that occurred in the euro money market, such as the reform of the Eurosystem's operational framework in March 2004 and the recent financial market turmoil, which has represented a break in the steady decline of asymmetries as evidence suggest.
This paper examines the importance of central bank communication in ensuring the effectiveness of monetary policy and in underpinning the credibility, accountability and legitimacy of independent central banks. It documents how communication has become a monetary policy tool in itself; one example of this being forward guidance, given its impact on inflation expectations, economic behaviour and inflation. The paper explains why and how consistent, clear and effective communication to expert and non-expert audiences is essential in an environment of an ever-increasing need by central banks to reach these audiences. Central banks must also meet the demand for more understandable information about policies and tools, while at the same time overcoming the challenge posed by the wider public's rational inattention. Since the European Central Bank was established, the communications landscape has changed dramatically and continues to evolve. This paper outlines how better communication, including greater engagement with the wider public, could help boost people's understanding of and trust in the Eurosystem.
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