Monetary Policy Communication Under Inflation Targeting: Do Words Speak Louder Than Actions?

Monetary Policy Communication Under Inflation Targeting: Do Words Speak Louder Than Actions?

Title : Monetary Policy Communication Under Inflation Targeting: Do Words Speak Louder Than Actions?
Number : 11/18
Author(s) : Selva Demiralp, Hakan Kara, Pınar Özlü
Language : English
Date : September 2011
Abstract : This paper assesses the effectiveness of monetary policy communication of the Central Bank of Turkey (CBT) by quantifying the information content of the policy statements released right after the monthly Monetary Policy Committee meetings. First, we quantify the signal regarding the next interest rate decision and ask whether communication improves predictability. Our findings suggest that the role of statements in predicting the next policy move have strengthened following the adoption of full-fledged inflation targeting (IT) regime. Second, we identify the surprise component of policy communication directly from market commentaries and assess its impact on the term structure of interest rates. We find that the response of the yield curve to policy statements have become highly significant for the unanticipated changes in the monetary policy communication, especially after the implementation of the IT. We also compare the yield curve impact of the surprise component of policy decisions (actions) with the surprises in policy communication (words). Our results suggest that the relative importance of communication in driving market yields have increased through time.
Keywords : Central Bank Communication, Predictability, Transparency
JEL Codes : E52; E58

Monetary Policy Communication Under Inflation Targeting: Do Words Speak Louder Than Actions?
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