Bank of Canada Communication and the Predictability of Canadian Monetary Policy

Bernd Hayo () and Matthias Neuenkirch ()

No 200935, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: We explain changes in the Canadian target rate using macroeconomic variables and Bank of Canada (BOC) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 60 target rate decisions between 1998 and 2006. We find that BOC communication is forward-looking, with a horizon that goes beyond the next meeting. Speeches and testimonies by Governing Council members have a statistically significant impact, whereas the less frequent monetary policy reports are insignificant. These communication variables significantly explain target rate changes but have no additional explanatory power over a standard Taylor rule. Prior to the introduction of Fixed Announcement Dates, BOC communication contained more information on upcoming policy moves. Communications by the U.S. Federal Reserve Bank (Fed)—which are much more frequent—outperform our Canadian communication indicators in predicting Canadian target rate decisions. We conclude that if the BOC is interested in improving the predictability of its monetary policy decisions, it should follow the Fed and use informal types of communication more frequently.newswire reports of Fed communications.

Keywords: Bank of Canada; Central Bank Communication; Interest Rate Decision; Monetary Policy; Ordered Probit Model; Taylor Rule (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:mar:magkse:200935

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