Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153302
Authors: 
Ehrmann, Michael
Fratzscher, Marcel
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 868
Abstract: 
Despite substantial differences in monetary policy and communication strategies, many central banks share the practice of purdah, a self-imposed guideline of abstaining from communication around policy meetings or other important events. This practice is remarkable, as it seems to contradict the virtue of transparency by requiring central banks to withhold information precisely when it is sought after intensely. However, imposing such a limit to communication has often been justified on grounds that such communication may create excessive market volatility and unnecessary speculation. This short paper assesses the purdah for the Federal Reserve. The empirical results confirm the conjecture that financial markets are substantially more sensitive to central bank communication around policy meetings. Short-term interest rates react three to four times more strongly to statements in the purdah before FOMC meetings than during other times, and market volatility increases (compared to a volatility reduction induced by statements otherwise). The findings thus offer relevant insights about the limits to central bank transparency.
Subjects: 
communication
effectiveness
Federal Reserve
Interest Rates
monetary policy
purdah
transparency
JEL: 
E58
E52
E43
Document Type: 
Working Paper

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