Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152991
Authors: 
Ehrmann, Michael
Fratzscher, Marcel
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 557
Abstract: 
The paper shows that central bank communication is a key determinant of the market’s ability to anticipate monetary policy decisions and the future path of interest rates. Comparing communication policies by the Federal Reserve, the Bank of England and the ECB since 1999, we find that communicating the diversity of views among committee members about monetary policy lowers the market’s ability to anticipate policy decisions as well as the future path of interest rates. This effect is sizeable, accounting for instance for one third to half of the prediction errors of FOMC policy decisions. By contrast, individualistic communication regarding the economic outlook is found to be beneficial for the Federal Reserve, enabling market participants to better anticipate the future path of interest rates. Thus, it is the collegiality of views on monetary policy but the diversity of views on the economic outlook that enhance the effectiveness of central bank communication.
Subjects: 
Bank of England
committee
communication
economic outlook
effectiveness
European Central Bank
Federal Reserve
monetary policy
JEL: 
E43
E52
E58
G12
Document Type: 
Working Paper

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