Jakob de Haan (University of Groningen) and Jan-Egbert Sturm (KOF, ETH Zurich)
description
Transcript of Jakob de Haan (University of Groningen) and Jan-Egbert Sturm (KOF, ETH Zurich)
28-29 April 2009
Is central bank communication really informative when forecasting interest rate decisions? New evidence based on a Taylor rule model for the ECB
Jakob de Haan (University of Groningen) and Jan-Egbert Sturm (KOF, ETH Zurich)
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Outline
Introduction Theoretical framework Data Empirical results Summary
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The role of communication in monetary policy
Communication strengthens the effectiveness of monetary policy
– If credible it can influence expectations by creating a strong belief that inflation will return to its target
fosters more openness
– Central bank independence requires accountability –accountability requires disclosure
may lead to more (financial) market stability
– Predictability reduces market uncertainty
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How successfull was ECB communication?
ECB communication moves financial markets in the right direction (Ehrmann/Fratzscher 2007, Musard-Gies 2006, Brand et al. 2006)
ECB communication affects the euro-dollar exchange rate(Conrad/Lamla 2007, Fratzscher 2004, Jansen/De Haan 2005, 2007a, Siklos/Bohl 2006)
ECB communication helps explain interest rate decisions(De Haan 2008)
But, does it really add new information? Heinemann/Ulrich 2007, Rosa/Verga 2007: yes Jansen/De Haan 2006: questionable
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Problems in the literature on central bank communication and interest rate decisions Most policy rules are estimated using (backward-looking)
output gap and inflation measures However, central banks are forward-looking and do not have access to the ex-post data researcher have
– Analysis should be based on real-time data(Gorter et al. 2008, Sauer/Sturm 2003, 2007, Sturm/Wollmershäuser 2008)
Policy rules contain limited information: inflation and output gap measures There is additional information available
– Most of this should be reflected in the actual money market rate The usual frequency employed is monthly,
ignoring the timeline of events within a month
– When is what kind of information available?
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Taylor rule (Taylor, 1993)
Policy instrument of a Central Bank: nominal short-term interest rate (it)
A Central Bank should react to: deviations of inflation (t) from target (*)
deviations of output (yt) from potential (y*)
• it = (r*+*) + (t–*) + (yt–y*)
where r* is the neutral real interest rate, and >0, >1 “Taylor principle”: >1
– if inflation increases, then – in order to raise the real rate –the nominal interest rate must increase more (i>)(Otherwise self-fulfilling bursts of inflation may be possible)
Theoretical justification: e.g. Svensson (1999) Such a rule is optimal for a Central Bank pursuing an inflation target
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Modified Taylor (or speed limit, or difference) rule
How to measure the output gap, (yt–y*)?
We assume a constant potential growth rate and include (yt–y*)
• it = (r*+*) + (t–*) + (yt-y*)
Motivations ECB does not focus on the output gap (Gerlach, 2007) Measurement issues w.r.t. the output gap
– Walsh (2003) and Geberding et al. (2004) argue that such a rule performs well in the presence of imperfect information
Growth rate cycles in general have a clear lead over classical cycles Most theoretical models abstract from long-run growth
– When allowing for trend growth, the optimal policy rule can be specified in terms of output growth
Forecasts are normally formulated in terms of growth rates
– (Expected) growth rates are readily available
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Modified Taylor rule (continued)
it = (r*+*) + (t–*) + (yt–y*t )
Traditionally actual (ex-post) inflation rate and output gap are used Backward-looking Taylor rules
Monetary policy operates with a lag and tries to affect future inflation Sauer and Sturm (2003, 2007) argue that Taylor Rules should be
forward-looking (and use real-time data) Gorter et al. (2008) confirm this using Consensus forecasts
it = (r*+*) + (Ett+12 –*) + (Etyt+12–y*)
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Interest rate smoothing
Central banks tend to move policy rates in small steps We view the previous equation to determine target interest rate, iTt
iTt = (y*+*) + (Ett+12 –*) + (Etyt+12–y*)
Actual interest rate, it, adjusts only slowly to this target
it = it-1 + (1 – )iTt + vt or: it = (1 – )(iTt – it-1) + vt
Observed inertia may also be explained by serially correlated error terms in the policy rule (omitted shocks like financial crises) (Rudebusch, 2002) vt = vt-1 + t
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Data
Coverage: Euro area, 1999–2007 However: most communication indicators only available for 1999–2004
Dependent variable: Main refinancing rate (MRR)
(as determined on ECB Governing Council meetings) Explanatory variables:
Expected inflation and expected GDP growth
– both taken from Consensus Economics Inc.and published before each ECB meeting
Communication indicators based upon ECB press releases Robustness check:
– Difference between MRR and the 1-month interbank rate (IBR)
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The policy/interbank rate and growth/inflation expect.
Sources: ECB, Datastream, Consensus Economics
Inflation
Growth
IBRMRR
0
1
2
3
4
5
0
1
2
3
4
5
1999 2000 2001 2002 2003 2004 2005 2006 2007
% %
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Communication variables
Means of communication Introductory statements after the monthly GC meetings Monthly Bulletins Irregular speeches and interviews
Data sources News tickers: Jansen/De Haan (2005), Ehrmann/Fratzscher (2007) Monthly Bulletin: Gerlach (2007) Press release after the Governing Council meeting
– Heinemann and Ullrich (2007) Covering 1999-2004(H&U)
– Berger, De Haan and Sturm (2006) Covering 1999-2004(BHS)
– Rosa and Verga (2007) Update Covering 1999-2007(R&V)
– KOF Monetary Policy Communicator Covering 1999-2007(MPC)
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Some background information on the KOF MPC
General problems of central bank communication indicators either too difficult to automate (subjectivity)
or too simple to be informative (simple word count) Solution: Media content analysis Media Tenor codes each introductory statement on the statement level The KOF MPC takes the balance of statements
that reveal upside risks and those that reveal downside risks to future price stability, relative to all such statements By construction, the index is restricted to [-1,1]
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The raw communication data (1)
Sources: Heinemann and Ullrich (2007), Berger et al. (2006)
-2
-1
0
1
2
3
4
1999 2000 2001 2002 2003 2004
-2
-1
0
1
2
3
4H&U, BHS H&U, BHS
BHS
H&U
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KOF MPC
The raw communication data (2)
Sources: Rosa and Verga (2007), KOF
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1999 2000 2001 2002 2003 2004 2005 2006 2007
-1.25
-1.00
-0.75
-0.50
-0.25
0.00
0.25
0.50
0.75
1.00
1.25R&V KOF MPC
R&V
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Timeline
Council meeting interest rate decision press communiqué
Councilmeeting
Release consensus inflation exp. growth exp.
New interest rate decision
time
Approximately one month
Interbank rate
At what moment in time do we forecast? At release date of Consensus Forecasts
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Correlation table of explanatory variables
(1) (2) (3) (4) (5) (6) (7) (8)
(1) MRR
(2) IBRt=CF - MRR
(3) Inflation exp.
-0.02 0.43 0.62
-0.20 0.31
-0.01(4) Growth exp.
0.21 0.27 0.32 0.04
0.35 0.29 0.40 0.13
0.26 0.14 0.15 0.170.51 0.71 0.77 0.16
(5) R&V(6) H&U (7) BHS
0.78 0.87 0.520.81 0.33
0.28(8) KOF MPC
-0.07
0.52 -0.250.55 0.35 -0.03
0.25 0.36 0.07 0.730.28 0.28 0.16 0.72 0.780.29 0.40 0.15 0.76 0.87 0.81-0.08 0.06 0.04 0.19 0.42 0.34 0.29
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Baseline models
(1) (2)
MRR t-1 ρ
Inflation exp. t=CF β
Growth exp. t=CF γ
Constant r*
-0.105 ***
(-3.480)
0.165 *
(1.670)
0.191 ***
(4.092)-0.389 **
(-2.187)
0.895 ***
(29.780)
1.581 **
(2.084)
1.823 ***
(6.309)1.086 ***
(6.316)
ObservationsR-squaredLog likelihood
Implied structural parametersOLS
0.22351.59
101
(3)
MRR t-1 -1.006 ***
(-3.928)
Inflation exp. t=CF 1.772 **
(2.274)
Growth exp. t=CF 1.762 ***
(4.712)
-56.65
Ordered Probit
101
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Models from t=CF perspective, Ord.Probit (1)
MRRt-1
Inflation exp.t=CF
Growth exp.t=CF
-0.855 ***
(-2.888)-0.056
(-0.062)0.873 *
(1.777)
-0.969 ***
(-2.631)0.136
(0.110)1.600 **
(2.454)
-0.997 **
(-2.417)-0.582
(-0.544)0.572
(0.989)
-0.964 ***
(-3.717)1.522 **
(2.071)1.702 ***
(4.261)
Comm.ind.t-1 1.131 ***
(3.921)
0.462 *
(1.795)
1.619 ***
(3.215)
0.887
(1.296)Comm.ind.t-2
Observations
Log likelihood
BHS
(3)
MPC
(4)
R&V
(1)
H&U
(2)
98
-41.74
67
-30.93
68
-23.68
101
-55.82
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Models from t=CF perspective, Ord.Probit (2)
MRRt-1 -0.805 *** -0.933 ** -0.952 ** -0.885 ***
(-2.580) (-2.363) (-2.356) (-3.350)Inflation exp.t=CF 0.310 -0.363 -0.531 1.129
(0.318) (-0.246) (-0.488) (1.365)Growth exp.t=CF 0.883 1.230 0.612 1.539 ***
(1.636) (1.709) (1.058) (3.856)
Comm.ind.t-1
Comm.ind.t-2
1.111 *** 0.470 * 1.722 *** 0.741
(3.083) (1.748) (2.869) (1.092)0.003 0.328 -0.207 1.856 ***
(0.009) (1.263) (-0.476) (2.920)
Observations
Log likelihood
R&V H&U BHS MPC
(6) (7) (8) (9)
94
-38.97
65
-30.05
67
-23.58
100
-52.64
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Models from t=CF perspective, Ord.Probit (incl. IBR)
MRRt-1 -0.799 ** -0.816 ** -1.111 ** -0.883 *** -0.770 ** -0.802 ** -1.090 ** -0.829 ***
(-2.325) (-2.220) (-2.184) (-3.217) (-2.193) (-2.066) (-2.332) (-2.933)IBRt=CF - MRRt-1 4.594 ** 7.27 *** 7.425 *** 5.541 *** 4.355 ** 7.336 *** 7.389 *** 5.141 ***
(2.210) (2.578) (2.756) (2.892) (1.972) (2.629) (2.735) (2.710)Inflation exp. t=CF 0.435 0.597 0.461 2.047 *** 0.846 0.613 0.474 1.664 **
(0.466) (0.465) (0.417) (2.659) (0.862) (0.425) (0.426) (2.005)Growth exp. t=CF 0.563 1.000 0.335 1.334 *** 0.691 0.979 0.340 1.225 ***
(1.100) (1.499) (0.561) (3.332) (1.286) (1.206) (0.563) (3.049)
Comm.ind. t-1 1.082 *** 0.635 * 1.782 *** 0.704
(3.937) (1.709) (3.401) (0.967)Comm.ind. t-2
1.047 *** 0.638 * 1.809 *** 0.609
(2.997) (1.685) (2.903) (0.863)
0.006 -0.032 -0.063 1.527 **
(0.021) (-0.115) (-0.121) (2.501)
Observations
Log likelihood
R&V H&U BHS MPC R&V H&U BHS MPC
(1) (2) (3) (4) (6) (7) (8) (9)
98 67 68 101 94 65 67 100
-37.15 -23.52 -18.12 -48.21 -35.20 -23.44 -18.11 -46.40
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Summary
Central bank communication has become an important tool in monetary policy
We estimate state-of-the-art Taylor rules Forward-looking (and real-time) data Good and robust fit describing actual ECB monetary policy well
Communication indicators focusing on the introductory statement released at the monthly press release of the ECB in general contain information on upcoming interest rate decisions Even when correcting for market expectations
contained in the 1-month interbank money market rate The KOF Monetary Policy indicator appears to have a longer lead
than other communication indicators