Can central bank communication help to stabilise inflation expectations?
| Published date | 01 July 2021 |
| Author | Alexander Jung,Patrick Kuehl |
| Date | 01 July 2021 |
| DOI | http://doi.org/10.1111/sjpe.12276 |
298
|
wileyonlinelibrary.com/journal/sjpeScott J Polit Econ. 2021;68:298–321.
© 2021 Scottish Ec onomic Society
1 | INTRODUCTION
Over the last de cades, central banks arou nd the world have increasingly use d public communication to suppo rt
their policy go als including the stabilis ation of inflation expect ations. This undertak ing was greatly facilitated by
an Internet revolu tion providing central banks with new means to comm unicate monetary polic y messages to a
Accepted: 15 Febr uary 2021
DOI: 10 .1111/sjpe.1 2276
ORIGINAL ARTICLE
Can central bank communication help to stabilise
inflation expectations?
Alexander Jung1| Patrick Kuehl2
1Directorate General Monetary Policy,
European Central Bank, Frankfurt am Main,
Germany
2Supervis ion, Associatio n for Financial
Markets in Europe, Frankfurt, Germany
Correspondence
Alexander Jung, European Central Bank,
Associatio n for Financial Mar kets in Europe,
Frankfurt am Main, Germany.
Email: Alexander.Jung@ecb.europa.eu
Abstract
This paper examines whether central bank communication
stabilises euro area inflation expectations through the in-
formation and news channel. A novelty of the study is its
use of data from Googl e Analytics on ECB website traff ic as
proxy for visitors’ attention to its communication. We con-
duct several econometric tests with daily data to measure
the impact of ECB communication on the information de-
mand of the public and ul timately on inflation expectatio ns.
Overall, this stu dy shows that website attention , as captured
by search volumes of visitor s, influences euro area inflation
expectation s. We find that increased website attent ion con-
tributes to narrowing the gap between market- based fore-
casts and (the mean of) longer- term professional inflation
expectations. Our findings add to the theoretical evidence
on the existence of an infor mation and news channel.
KEYWORDS
ECB communication, website attention, high-frequency
identification, forward guidance, information demand, inflation
expectations
JEL CLASSIFI CATION
C20; D80; E52; E58; G14
|
299
JUNG aNd KUEHL
wide range of audiences, while allowing the public a better access to central bank information. Because of its
timely and non- discriminator y information provision, the web site has evolved into a key communicatio n tool for
central banks that provides the public with precise information about its monetary policy narrative (Fracasso
et al., 2013). For this rea son, knowledge about visitor s’ search behaviour on the centra l bank's website not only
can give clues ab out their information needs o n monetary policy, but also on t he formation of their inflation e x-
pectation s, given that the primary ob jective of the ECB’s monetar y policy is price stabilit y.1 Indicators on s earch
activity based on big data can support macroeconomic forecasting (e.g. Choi & Varian, 2012; d’Amuri &
Marcucci, 2017; Nymand- Andersen & Pantelidis, 2018) and the analysis of the monetary policy transmission
(Benamar, Foucault , & Vega, 2020; Meinusch & Till mann, 2017; Tillmann, 2020).
There is a debate on w hether the success of central b anks to stabilise inflatio n close to target has made eco-
nomic actors less attentive to news. To address this issue, we examine whether website attention of visitors—
mainly professionals such as market participants, analysts, wire services, journalists (but may also include the
general publi c)— to ECB com munication has incre ased over time, and whet her this has helped to s tabilise euro area
inflation expectations.2 The oretically, the model by Eusepi an d Preston (2010) makes the case that ce ntral bank
communicatio n can lead to increased macroe conomic stability, when agent s face uncertainty ab out the interest
rate path, while t he central bank has uncert ainty about the economic s tate. Accordingly, the expec tation forma-
tion process proceeds in two stages: before the central bank communication, when people form expectations
based on atheor etical beliefs; and afte r the communication, wh en the central bank credibl y announces its mone-
tary polic y, people must incorpor ate this news in their exp ectation model. T his setting allows to de tect announce-
ment effect s through the informatio n channel (updating of belief s) or the news channel (change in th e number of
informed subje cts) or both (Lamla & V inogradov, 2019). Furthermo re, a theoretical mo del by Lamla and Lein (2 014)
predicts t hat more news provided through th e media would allow agents to make the ir inflation forecasts mor e
accurate.
A growing number of s tudies points to the key role of cent ral bank information for stee ring market expecta-
tions and for successful monetary policy at large (e.g. Bernanke, 2015; Blinder, 1999; Blinder et al., 2008;
Disyatat, 20 08; Ehrmann & Fratzs cher, 2007; Gürkaynak et al., 20 05; Issing, 2005; Shin, 2 017; Woodford, 2012).3
The literature has also shown that information provided by a central bank may have a larger impact on market
expectations than private information (Amato & Shin, 2003). On the one hand, public information can help to
stabilise mar ket expectations, par ticularly in periods of h eightened uncertaint y (Eusepi & Preston, 2010). On the
other hand, pub lic information can c rowd out private informat ion, thereby creat ing a negative extern ality (Amador
& Weill, 2012; Morris & Sh in, 2005). The empiric al literature finds that e specially communicati on at press confer-
ences, which contain helpful information about current and future interest rate decisions, may increase media
coverage (Berger et al., 2011; Binder, 2017; Blinder et al., 2008; Jansen & de Haan, 2009; Rosa & Verga, 2007;
Sturm & de Haan, 2011).4 At the s ame time, unclear co mmunication by centr al banks may desta bilise expectat ions,
if they trigger l arge unintended market rea ctions and lead to advers e real economic effec ts (Poole, 2005).
The measureme nt of the transmission is facilit ated by the fact that the ECB has a clear p rimary objective of
price stabili ty and gives detail ed information on the ec onomic outlook, an d since 2013 on the likely path for f uture
1Economic ac tors’ informat ion- seeking beh aviour often inv olves search en gines. Among e xisting searc h engines Goog le is by far the lead ing
contender. Ind ividuals with h igher incomes n ormally rely m ore on the Intern et when gather ing informatio n for investment d ecisions. A gen der bias
may exist whe reby males rely m ore on the Intern et than females ( Lee and Cho, 20 05).
2The term “web site attentio n” is closely relat ed to the term “med ia attention,” wh ich has been app lied more widel y in the literatu re and refers to
coverage in T V, newspapers and o ther media (Bin der, 2017). By compar ison, website at tention extr acts inform ation on visitor s’ interest in ECB
communications at the source.
3Market expe ctations may al so respond to the t one and sentim ent of central ban k communicati on (Hansen, McM ahon and Prat, 2 018; Hubert and
Labondance, 2017).
4A too high degre e of transparen cy can also conf use the public , more informat ion provided by a ce ntral bank may not n ecessarily i ncrease clari ty
(Gersbach , 2003; Issing , 2005; Winkle r, 2000). The te rm transpare ncy refers to a “cont inuous flow” of r elevant inform ation about mon etary poli cy
to an externa l audience (Neu mann, 2002).
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting