## Central Bank Communication and Monetary Policy Surprises in Chile

_IMF Working Papers, July 6, 2018_

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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

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### 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).*

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_Source: https://www.imf.org/en/publications/wp/issues/2018/07/06/central-bank-communication-and-monetary-policy-surprises-in-chile-46000_