Working Paper: CEPR ID: DP8094
Authors: Benjamin Born; Michael Ehrmann; Marcel Fratzscher
Abstract: In response to the financial crisis of 2007-2010, many central banks are getting involved in macroprudential supervision. Central bank communication will constitute a central policy tool for that purpose. The paper asks how such communication will affect financial markets, exploiting the fact that many central banks have had some financial stability role in the past, and have communicated extensively on this through the publication of Financial Stability Reports (FSRs) and financial stability-related statements. Building a unique dataset, it provides an empirical assessment of the financial market reactions to more than 1000 releases of FSRs and speeches in 36 countries over the past 14 years. The findings suggest that FSRs have a significant and potentially long-lasting effect on stock market returns, and also tend to reduce market volatility. Speeches and interviews, in contrast, have little effect on market returns and tend to increase volatility during tranquil times, but can have a substantially larger effect during periods of financial stress. Moreover, central bank communication can affect markets even when leaning against asset price booms. The findings underline the importance of differentiating between communication tools and content when designing a communication strategy on macroprudential issues.
Keywords: Central Bank Communication; Economic Policy; Financial Stability; Macroprudential
JEL Codes: E44; E58; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial stability reports (FSRs) (G28) | stock market returns (G17) |
| financial stability reports (FSRs) (G28) | market volatility (G17) |
| financial stability reports (FSRs) containing optimistic assessments of risks (G28) | market volatility (G17) |
| speeches and interviews by central bank governors (E58) | stock market returns (G17) |
| speeches and interviews by central bank governors (E58) | market volatility (G17) |
| speeches and interviews by central bank governors during tranquil times (E58) | market volatility (G17) |
| speeches and interviews by central bank governors during periods of financial stress (E44) | stock market returns (G17) |
| central bank communication (E58) | asset prices (G19) |
| central bank communication (E58) | market expectations (D84) |