The effect of ECB communication on interest rates: An assessment

This paper reviews the literature on the communication policy of the European Central Bank (ECB) addressing two questions. First, to what extent has ECB communication affected interest rates? Second, to what extent has ECB communication affected the predictability of the ECB's interest rate decisions? On the basis of a survey of empirical studies, it is concluded that various forms of ECB communication lead to more volatility. However, studies focusing on volatility cannot assess whether markets moved in the intended direction. To analyze whether this is the case, researchers have coded ECB communications. Studies using this approach yield evidence that communications generally move financial markets in the intended direction. There is also substantive evidence that ECB communications increase the predictability of interest decisions by the ECB Governing Council. Finally, the consequences of the fact that ECB officials often gave contrasting signals to market participants are analyzed. New evidence suggests that inconsistent communication causes agents to make less accurate predictions. The policy implication is that central bankers should take care that their statements are consistent.