Arbeitspapier

How should central banks communicate?

The paper shows that central bank communication is a key determinant of the market’s ability to anticipate monetary policy decisions and the future path of interest rates. Comparing communication policies by the Federal Reserve, the Bank of England and the ECB since 1999, we find that communicating the diversity of views among committee members about monetary policy lowers the market’s ability to anticipate policy decisions as well as the future path of interest rates. This effect is sizeable, accounting for instance for one third to half of the prediction errors of FOMC policy decisions. By contrast, individualistic communication regarding the economic outlook is found to be beneficial for the Federal Reserve, enabling market participants to better anticipate the future path of interest rates. Thus, it is the collegiality of views on monetary policy but the diversity of views on the economic outlook that enhance the effectiveness of central bank communication.

Language
Englisch

Bibliographic citation
Series: ECB Working Paper ; No. 557

Classification
Wirtschaft
Interest Rates: Determination, Term Structure, and Effects
Monetary Policy
Central Banks and Their Policies
Asset Pricing; Trading Volume; Bond Interest Rates
Subject
Bank of England
committee
communication
economic outlook
effectiveness
European Central Bank
Federal Reserve
monetary policy
Geldpolitik
Zentralbank
Internationale Zusammenarbeit
EU-Staaten
Großbritannien
USA

Event
Geistige Schöpfung
(who)
Ehrmann, Michael
Fratzscher, Marcel
Event
Veröffentlichung
(who)
European Central Bank (ECB)
(where)
Frankfurt a. M.
(when)
2005

Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.

Object type

  • Arbeitspapier

Associated

  • Ehrmann, Michael
  • Fratzscher, Marcel
  • European Central Bank (ECB)

Time of origin

  • 2005

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