How do Central Banks Write?An evaluation of Inflation Reports by Inflation-Targeting Central Banks

Andrea FracassoHans GenbergCharles Wyplosz

Our brief

What constitutes international ‘best practice’ in Inflation Report

Not a study of inflation targeting as such

Sponsored by the Bank of Norway but not a specific study of its Inflation Report

Our conclusions

1. Central bank communication is particularly important in an IT framework

2. Inflation reports are efficient ways to convey the essence of IT strategies

3. It is possible to identify a set of core themes that must be treated for an IR to be in the ‘best practice’ league

4. High-quality IRs and predictability of monetary policy appear to be related

Why do IT countries publish Inflation Reports?

The nature of inflation targeting IT is a precise mandate which must be

delegated to an independent central bank

For delegation do be acceptable it must be viewed as legitimate and this requires accountability

Why do IT countries publish Inflation Reports?

IT requires good communication Explain and justify mission Explain and justify strategy Inflation forecast becomes crucial

Whose is it? How is it prepared? How uncertain is it?

All very complicated: Inflation Report

Why do IT countries publish Inflation Reports?

Anyway efficient policy calls for maximum transparency, IT or not

Central bank controls short term interest rate

Policy works through: Long-term interest rates Exchange rate Asset prices All are set by markets and their expectations

Shaping market expectations is important

There are many ways to communicate

Speeches, press releases, general pamphlets, Inflation reports/Quarterly Bulletins, Annual Reports, Research Papers

Many are intended for one particular audience or to serve one particular function

All are necessary, however…

The special role of the Inflation Report

Collects all relevant information about the monetary policy strategy in one document

Linked to monetary policy decisions Continuity Not to be overlooked: it shapes work

routines and responsibilities within the Central Bank

What must be included in a comprehensive IR?

Objectives and decision making process

Analytical framework Inflation forecast and performance

evaluation Executive summary, Continuity,

Length, ‘Boxes’ Precise structure not crucial, clarity

and logical reasoning is

How do reports measure up?

Results of a survey 20 IT central banks reports Read and rated by 5 graduate students

Caveats Small “poll” Latest reports only In English

Factual information Table 1.1

What countries are we talking about? What is the ’IR’ called, when was it first

published, frequence of issue, length? Table 1.2

Main elements of IT practice Who decides, size of ’MPC’ Voting vs. Consensus What is the target inflation rate? Who ’owns’ the inflation forecast?

Table 3.12 How are policy decisions announced?

Subjective evaluation Quality of information. Table 3.1 Clarity of assumptions. Table 3.2 Quantity of information. Table 3.3 How hard is it to find information. Tab. 3.4 Presentation of policy-making process. Tab. 3.5 Nature of inflation forecasts. Tab. 3.6-3.7 Nature of executive summary. Tab. 3.9 Overall assessment. Tab. 3.10

Quality of information. Table 3.1

Rate on a scale of 10 (1=bad, 10= good) the quality of the following information provided

Discussion of past

decisions

Discussion of current

challenges

Generally, presentation

of the strategy

Disagreements within the

policy-making committee

Arguments for future decisions

8.2 8.8 8.8 5.4 4.2

2.7 1.1 1.1 2.7 2.6

Clarity of assumptions. Table 3.2

Rate on a scale of 10 (1=bad, 10= good) the quality of the following information provided

Assumptions made at time of decision

  Domestic demand        

Exchange rate

Private PublicForeign demand

Foreign financial conditions

Financial markets

Generally, uncertainty

7.4 9.6 9 9 9 9.2 8.4

2 1 1 1 1 1 1

Overall assessment.Table 3.10

Overall assessment (1 = poor, 10 = good)

Is the report

convincing

Does the central bank

show its expertise

Is the report

complete

Writing style

Information provided

Is the report intimidating

to economists

to non economists

9.2 8.8 8.9 10 9.2 9.1 6.3

0.4 1.6 0.2 0 0.4 0 0.4

How do reports measure up? Overall (average of first 5 cols. of Table 3.10)

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Why are there differences accross countries? ’Old’ vs. ’New’ inflation targeters? Quantity of information vs. Length? Conscious decision to be selective in the information

provided? Some information provided in other forms: Speaches,

press releases, … Our evaluation is flawed

One issue instead of entire year Small number of readers Differences in the ’objective function’ of our readers

compared to the intended audience of the IR. Genuine differences in clarity of the strategy and the

ability to communicate.

Is there any evidence that the quality of IRs matter?

Exploratory empirical study of the relationship between the predictability of monetary policy and the quality of the country’s IR

The empirical setup

Surprise element in monetary policy

Macroeconomicfactors

Characteristics of Inflation report

Interest rate levelsInterest rate volatility

Overall assessmentAssessment of

Executive Summary

The better the Inflation Report the lower the interest rate surprise

R2 = 0.4713

00.010.020.030.040.050.060.070.080.09

0.1

3 4 5 6 7 8 9 10

'Combined' Index of Quality of Inflation Report

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The empirical setup

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STICCHARACTERISURPRISE

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Measuring monetary policy surprises

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An alternative specification

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Quality vs. vagueness

R2 = 0.5439

3

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0 0.5 1 1.5 2 2.5

Standard deviation of ratings across readers

Qu

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Correlation is not causality Alternative interpretation of the results Good report → better understanding =

fewer surprises

Good Policy Good central bank

Good Report