Central Bank Communication and Monetary Policy Effectiveness: Evidence from Thailand

Pongsak Luangaram and Yuthana Sethapramote

No 20, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: This paper has two main objectives. First, we introduce a novel textual analysis technique for estimating latent policy position in the monetary policy committee (MPC) statement based on word frequencies (so called ‘Wordfish', developed by Slapin and Proksch, 2008). This method is applied to extract informational content embed in the MPC statements during the first decade of inflation targeting in Thailand. Second, we provide a comprehensive assessment of communication on monetary policy effectiveness in three main aspects, i.e. predictability of short-run policy interest rate, monetary transmission mechanism and the ability to anchoring long-run inflation expectations. Specifically, by augmenting our communication measure with various Taylor-type rule specifications, it is found that monetary policy statements help to improve short-run predictability of policy interest rate. Furthermore, using structural vector autoregression, we find that the impulse responses of policy rate shock on output and inflation are stronger when communication is included, indicating the improved efficacy of the transmission mechanism process. Our econometric results also indicate that the MPC statement exerts its influence over the yields with longer maturities. Finally, an increase in policy interest rate can anchor expected inflation only in the short run, while monetary policy communication provides additional effects to long-term inflation expectations.

Keywords: Monetary policy statement; Central bank communication; Taylor rule; Monetary policy transmission mechanism (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2016-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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