How do Central Banks Write? An evaluation of Inflation Reports by Inflation-Targeting Central Banks Andrea Fracasso Hans Genberg Charles Wyplosz

Our brief  What constitutes international ‘best practice’ in Inflation Report Not a study of inflation targeting as such Sponsored by the Bank of Norway but not a specific study of its Inflation Report

Our conclusions 1.Central bank communication is particularly important in an IT framework 2.Inflation reports are efficient ways to convey the essence of IT strategies 3.It is possible to identify a set of core themes that must be treated for an IR to be in the ‘best practice’ league 4.High-quality IRs and predictability of monetary policy appear to be related

Why do IT countries publish Inflation Reports?  The nature of inflation targeting IT is a precise mandate which must be delegated to an independent central bank For delegation do be acceptable it must be viewed as legitimate and this requires accountability

Why do IT countries publish Inflation Reports?  IT requires good communication Explain and justify mission Explain and justify strategy Inflation forecast becomes crucial  Whose is it?  How is it prepared?  How uncertain is it? All very complicated: Inflation Report

Why do IT countries publish Inflation Reports?  Anyway efficient policy calls for maximum transparency, IT or not  Central bank controls short term interest rate  Policy works through: Long-term interest rates Exchange rate Asset prices All are set by markets and their expectations  Shaping market expectations is important

There are many ways to communicate  Speeches, press releases, general pamphlets, Inflation reports/Quarterly Bulletins, Annual Reports, Research Papers  Many are intended for one particular audience or to serve one particular function  All are necessary, however…

The special role of the Inflation Report  Collects all relevant information about the monetary policy strategy in one document  Linked to monetary policy decisions  Continuity  Not to be overlooked: it shapes work routines and responsibilities within the Central Bank

What must be included in a comprehensive IR?  Objectives and decision making process  Analytical framework  Inflation forecast and performance evaluation  Executive summary, Continuity, Length, ‘Boxes’  Precise structure not crucial, clarity and logical reasoning is

How do reports measure up?  Results of a survey 20 IT central banks reports Read and rated by 5 graduate students  Caveats Small “poll” Latest reports only In English

Factual information  Table 1.1 What countries are we talking about? What is the ’IR’ called, when was it first published, frequence of issue, length?  Table 1.2 Main elements of IT practice  Who decides, size of ’MPC’  Voting vs. Consensus  What is the target inflation rate?  Who ’owns’ the inflation forecast?  Table 3.12 How are policy decisions announced?

Subjective evaluation  Quality of information. Table 3.1  Clarity of assumptions. Table 3.2  Quantity of information. Table 3.3  How hard is it to find information. Tab. 3.4  Presentation of policy-making process. Tab. 3.5  Nature of inflation forecasts. Tab  Nature of executive summary. Tab. 3.9  Overall assessment. Tab. 3.10

Quality of information. Table 3.1 Rate on a scale of 10 (1=bad, 10= good) the quality of the following information provided Discussion of past decisions Discussion of current challenges Generally, presentation of the strategy Disagreements within the policy-making committee Arguments for future decisions

Clarity of assumptions. Table 3.2 Rate on a scale of 10 (1=bad, 10= good) the quality of the following information provided Assumptions made at time of decision Domestic demand Exchange rate PrivatePublic Foreign demand Foreign financial conditions Financial markets Generally, uncertainty

Overall assessment.Table 3.10 Overall assessment (1 = poor, 10 = good) Is the report convincing Does the central bank show its expertise Is the report complete Writing style Information provided Is the report intimidating to economists to non economists

How do reports measure up?  Overall (average of first 5 cols. of Table 3.10)

Why are there differences accross countries?  ’Old’ vs. ’New’ inflation targeters?  Quantity of information vs. Length?  Conscious decision to be selective in the information provided? Some information provided in other forms: Speaches, press releases, …  Our evaluation is flawed One issue instead of entire year Small number of readers Differences in the ’objective function’ of our readers compared to the intended audience of the IR.  Genuine differences in clarity of the strategy and the ability to communicate.

Is there any evidence that the quality of IRs matter?  Exploratory empirical study of the relationship between the predictability of monetary policy and the quality of the country’s IR

The empirical setup Surprise element in monetary policy Macroeconomic factors Interest rate levels Interest rate volatility Characteristics of Inflation report Overall assessment Assessment of Executive Summary

The better the Inflation Report the lower the interest rate surprise

The empirical setup

Measuring monetary policy surprises

An alternative specification

Quality vs. vagueness

Correlation is not causality  Alternative interpretation of the results  Good report → better understanding = fewer surprises Good Policy  Good central bank Good Report