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Central Bank Communication and Monetary Policy Predictability under Uncertain Economic Conditions

Jonne Lehtimäki and Marianne Palmu ()
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Marianne Palmu: Inderes, Turku, Finland

Journal of Central Banking Theory and Practice, 2019, vol. 8, issue 2, 5-32

Abstract: Modern central banks increasingly value monetary policy transparency, and attempt to build credibility by communicating their decisions to the public. This paper studies whether the communication of central banks can be used to explain upcoming changes in their most important monetary policy instrument, the short-term refinancing rate, and whether the public can trust central bank communication during times of financial crisis. This is done by constructing an indicator to measure the predictability of monetary policy by calculating the median of the policy makers’ official comments. The performance of this indicator is studied with ordered probit methods. The results show that predictability was reached relatively well at central bank level during the financial crisis despite the rapid growth of economic uncertainty, and that communication can be a useful tool for central banks during uncertain times.

Keywords: Monetary Policy; Central banking; Communication; Central Banks and Their Policies. (search for similar items in EconPapers)
JEL-codes: D83 E50 E52 E58 E59 (search for similar items in EconPapers)
Date: 2019
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