Macroprudential Policy and Central Bank Communication

44 Pages Posted: 29 Nov 2010

See all articles by Benjamin Born

Benjamin Born

Frankfurt School of Finance & Management

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Date Written: November 2010

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 Classification: E44, E58, G12

Suggested Citation

Born, Benjamin and Ehrmann, Michael and Fratzscher, Marcel, Macroprudential Policy and Central Bank Communication (November 2010). CEPR Discussion Paper No. DP8094, Available at SSRN: https://ssrn.com/abstract=1714866

Benjamin Born (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Michael Ehrmann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Marcel Fratzscher

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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