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Public Choice

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01.10.2013

Dispersed communication by central bank committees and the predictability of monetary policy decisions

verfasst von: Michael Ehrmann, Marcel Fratzscher

Erschienen in: Public Choice | Ausgabe 1-2/2013

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Abstract

The paper asks whether members of central bank decision-making committees should communicate with the public in a collegial manner, by conveying the consensus or majority view of the committee, or in an individualistic way, by providing the diversity of views among the committee members. It finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly. This effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market’s prediction errors of FOMC policy decisions. Moreover, more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates. These findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication.

Vorheriger Artikel Political polarization, congressional redistricting, and trade liberalization

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As the inter-meeting period spans around six to seven weeks, it could be that dispersion in communications stems not from different views across FOMC members, but rather from an evolution of views over time. However, it seems that indeed most of the dispersion reflects differences in opinion: First, dispersion measures for individual FOMC members are close to zero; second, dispersion measures for shorter time spans, such as for the two weeks prior to an FOMC meeting, lead to basically unchanged results.

Cukierman and Wachtel (1979, 1982) show that the cross-sectional variance of survey expectations data provides a proxy for macroeconomic uncertainty. We are grateful to Tao Zha for kindly sharing these data series with us. Note that the survey asks its participants to provide expectations through the end of the subsequent year. We use standard deviation measures of expectations that are seasonally adjusted, using a regression of the series on monthly dummies, in order to control for different time lengths of forecast horizons.

The set of macro news comprises advance GDP, consumer confidence, the CPI, industrial production, the Institute for Supply Management survey, nonfarm payrolls, producer prices, retail sales, the trade balance and unemployment. We use the surprise component within each macroeconomic announcement, by subtracting a survey-based expectation measure (obtained from MMS International) from the actually released figure. The macro dispersion measure follows that for communication, using the direction of the surprise of macro announcements to classify them as containing positive or negative news about the economy. Higher than expected inflation releases are counted as “positive” surprises, as they would point towards higher interest rates in the same fashion as “positive” real developments.

Note that the point estimates shown in the tables are marginal effects evaluated at the respective means of the independent variables, and thus one cannot easily evaluate the effect of any change on the dependent variable. However, evaluating the model at a dispersion measure of zero and then comparing it to the predicted value with the dispersion measure at one shows that the overall effect of such a change is very similar, in most cases only slightly larger than the marginal effects shown in the tables. For instance, for column (3) in Table 2, a change of dispersion from zero to one raises the prediction error by 5.4 basis points as compared to a marginal effect of 5.3 basis points in the table.

We use these discrete versions of high and low uncertainty regimes rather than directly interacting the uncertainty measures with communication dispersion, for two reasons. First, they sharpen the empirical analysis (results show more statistical significance), and second, the coefficients are much easier to interpret.

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Titel: Dispersed communication by central bank committees and the predictability of monetary policy decisions
verfasst von: Michael Ehrmann
Marcel Fratzscher
Publikationsdatum: 01.10.2013
Verlag: Springer US
Erschienen in: Public Choice / Ausgabe 1-2/2013
Print ISSN: 0048-5829
Elektronische ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-012-9941-0

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