New ECB research
New ECB working paper written by H.Berger, M.Ehrmann and M.Fratzscher looks at how media report on ECB policy decisions, speeches etc.
- strong wording of ECB communication gets wider press coverage
- critical views about ECB policy are reported more often than positive views
- decisions are compared to market expectations, surprizes are commented less favourably
- ECB decisions are discussed less favourably also when inflation exceeds 2%, which is a definition of price stability, so media not only monitores the ECB but also evaluates its actions
- large information content during the conference and large number of ECB president statements prior to conference improve coverage and imply a better understanding of ECB decision
- after the introduction of quarterly inflation and output forecasts favorableness of the newspapers reporst after ECB conferences significantly improved
Communication becomes crucial
Some twenty years ago central bankers believed that in order to affect economy and inflation one has to surprise, as rational consumers will recognize any systematic action pattern and adjust accordingly. Today we know, that monetary policy in expectations management business, and when you surprise, you fail in your management endevor. Therefore central banks spend a lot of time looking at what are markets and other agents expectations regading policy decisions. When these expectations diverge from what central bank expects to be a desired policy path, then often an extra communication effort is made.
Traditionally when one analyzed how monetary policy impulses get transmitted into the economy one looked at the banking sector, at credit and deposit rates. Today, as shown by B-E-F paper newspapers (and media in general) have become equally important, or maybe even a more important channel. This area requires a lot of further research. I and my colleagues at the NBP have a paper that looks at how effective is central bank communication in Czech Republic, Hungary and Poland. It is forthcoming in European Journal of Political Economy in early 2007, but for the time being the working paper version can be accessed below.