Central Bank Communication and Monetary Policy Surprises in Chile

IMF Working Papers, July 6, 2018

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Central Bank Communication and Monetary Policy Surprises in Chile

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Bibliographic details

• Authors: Andrea Pescatori
• Published: July 6, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484363102.001

Summary and Objective

• This paper assesses the quality of the CBC’s communication policy by looking at the predictability and effectiveness of monetary policy communications by the Central Bank of Chile (CBC).
• To do so, the authors construct indeces of monetary policy surprises for the three major communication channels of the CBC: the release of policy meetings’ statements, minutes, and monetary policy reports (IPoM).
• The assessment focuses on the size and time-evolution of monetary policy surprises associated with meeting statements and the impact of these communication channels on asset markets.

Methodology (communication channels and measurement)

• Monetary policy surprise indeces are constructed for:
  • Policy meetings’ statements
  • Minutes
  • Monetary policy reports (IPoM)
• Predictability and efficacy are evaluated by:
  • The size and time-evolution of surprises associated with meeting statements
  • The impact of communication channels on asset markets (equity prices and the exchange rate)
  • A proxy VAR is used to estimate macroeconomic impacts of monetary policy shocks

Key Findings

• General effectiveness
  • The CBC has been effective in its forward guidance through its statements and IPoM.
• Predictability
  • Policy actions are quite predictable, especially post the global financia crisis.
• Asset market responses
  • The response of equity prices and the exchange rate to monetary policy surprises have the right sign but are not robust.
  • There is an asymmetric response of equity prices to minutes, suggesting market participants extract information on the status of the economy especially when minutes have a loosening effect.
• Macroeconomic impact (proxy VAR result)
  • A 100 bps monetary policy tightening shock implies a decline in economic activity (IMACEC) of about 2 pp. after one year.
  • The response of inflation is more muted.

Interpretation and Implications

• Forward guidance delivered via statements and IPoM appears to improve central bank predictability for markets.
• Heterogeneous asset responses and limited robustness imply communication can be necessary but not always sufficient to move financial variables strongly.
• Asymmetric market interpretation of minutes indicates markets pay attention not only to direction but to informational content about economic conditions, particularly when minutes indicate loosening.

Source: Central Bank Communication and Monetary Policy Surprises in Chile, Andrea Pescatori, IMF Working Paper (2018/156).

Content in this bundle

• Central Bank Communication and Monetary Policy Surprises in Chile, WP/18/156, July 2018
  • Central Bank Communication and Monetary Policy Surprises in Chile, WP/18/156, July 2018 (Markdown version)
  • Central Bank Communication and Monetary Policy Surprises in Chile, WP/18/156, July 2018 (PDF)