Ellen E. Meade American University May 31 Bank of Korea International Conference 2010 Communication Policy of the ECB: An Overview of the First Decade

We live in interesting times…  New challenges for CB independence and transparency/communication:  Will Fed monetary policy be subject to audit?  Will officials in regional Federal Reserve banks be subject to legislative approval?  Do CB purchases of government securities constitute fiscal policy and/or endanger independence?  How can the CB best communicate unusual and unorthodox policies in an uncertain environment?

Comment on 2 papers:  “The communication policy of the European Central Bank: An Overview of the First Decade” by Jakob de Haan and David-Jan Jansen  Broad survey of issues in CB communication  Generally favorable assessment of ECB  “Does central bank communication really lead to better forecasts of policy decisions? New evidence based on a Taylor rule model for the ECB” by Jan- Egbert Sturm and Jakob de Haan  Adds communication indicators to standard Taylor rule

CB communication  An element of institutional transparency  “Revolution” in communication over past 20 years  Adoption of inflation targeting in New Zealand (1990) Canada, Israel (1991); many others including Korea (1998) IT framework necessitates communication about CB goals, procedures, assessments, forecasts  CBs not alone in communication revolution Internet makes instant communication possible CIA communicates much more How much communication is necessary or desirable?

Effects of CB communication  Provides democratic accountability for an independent institution  Increases effectiveness of monetary policy  Focus of De Haan papers  Manage/direct private-sector expectations (interest rates, inflation, economic forecasts) Financial market participants General public (is this effectiveness or accountability?)

Communication: how and about what?  Through CB statute, press conferences, monthly reports, testimony, speeches, interviews  About formal objectives, decisions, decision-making procedures, future policy decisions  Code words (“vigilence” from )  Culture, societal context, repetition, consistency important Bundesbank missed M3 targets but always understood Presents challenges during crisis when in uncharted territory

Measuring effects (1)  On volatility of financial prices  FOMC statements significantly impact market interest rates across term structure (Kohn and Sack, 2004)  ECB communication has significant effects on short- and long-term interest rates, stock markets, swap markets  Introductory statements at press conference most effective  Communication may create news (increase volatility), but does it reduce uncertainty?

Measuring effects (2)  If communication reduces uncertainty, then monetary policy should be more predictable  Communication improves predictability of policy rates ECB and Fed policies about equally predictable (Ehrmann and Fratscher, 2007)  Inflation targeting associated with lower variance of private-sector forecasts of inflation (Crowe, 2010) But not much evidence that ECB communication reduces inflation forecast variance

Measuring effects (3)  Do financial prices move in “intended” direction?  Requires coding of intended effects – subjective  Sturm and de Haan estimate Taylor rule of the ECB’s main refinancing rate With and without coded measure of communication Experiment with alternative codings of ECB President’s introductory statement Different codings generally highly correlated But yield very different estimated parameters in Taylor rule

Summing up  Paper provides nice summary of issues in communication literature  Reviews results for the ECB  ECB gets relatively high marks  Still?  At odds with recent events?

Good communication?  Trichet at ECB press conference, January 14 th :  We will not change our collateral framework for the sake of any particular country. Our collateral framework applies to all countries concerned. … That is crystal clear.  ECB press release, May 3 rd :  … has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Greek government.

Good communication?  ECB press conference, May 6 th :  Question: Is the purchase of government bonds an option to fight the consequences of Greece’s fiscal crisis on financial markets? Did you discuss this option.  Trichet: … we did not discuss this option.  ECB press release, May 10 th :  … decided to conduct interventions in euro area public and private debt securities markets… to ensure depth and liquidity in those market segments which are dysfunctional.