Essays in Monetary Policy and Central Bank Communication

The two particular areas that I aim to explore are the effects of central bank communication on financial market and household behaviour and trading activity surrounding policy announcements, speeches and press conferences. The first chapter will look at the effects of regular quantitative forecasts produced by central banks on market expectations and asset prices. Quantitative forecasts can be used to guide expectations of future policy rates and economic activity (Blinder et al, 2008). This gives rise to various questions: do market participants actually react to surprises in forecasts of different economic variables? Is this response of market expectations one-to-one? How does the reaction vary with the forecast horizon? My contributions will include proposing a new identification strategy for projection shocks using appropriate financial market instruments and analysing the effects of not only interest rate, but also inflation forecasts. I also intend to use GARCH-type models to assess the impact of such shocks on volatility. Chapter 2 will explore the real effects of communication shocks. The existing literature generally uses macro-level data on real variables. I believe that micro-level data could also provide interesting insights. I note that there has not, to the best of my knowledge, been much research into how individual household behaviour changes in response to communication shocks regarding the outlook for the economy. To study how people react to communication shocks, I would conduct a survey asking individuals directly how they would adjust their own consumption in response to various hypothetical scenarios (e.g. a statement suggesting that the economy is likely to enter a recession). This use of hypothetical scenarios draws from Cunha, Elo and Culhane (2013) in the human capital literature.