Research On Effectiveness Of Central Bank Communication During The Transition Period Of Monetary Policy Framework

In recent years,as central banks become increasingly independent and monetary policy framework enhances,most of central banks put emphasis on communication.Central bank communication transfers from “secretive and vague” to “transparent”,and becomes an important tool of monetary policy in western countries.Meanwhile,as the comprehensive national power of China keeps rising and opening-up is deepening,China’s monetary policy attracts worldwide attention,foreign scholars,investors and governments conveyed their desire to acquire more information of the PBC’s communication on various occasions.Unlike developed countries,China’s monetary policy is converting from quantitative to price-oriented,expectation management and moderate communication with markets becomes prominent.The PBC’s communication with markets has strengthened through medium like China Monetary Policy Report and governors’ talks,which improved the transparency of monetary policy and guided the market expectation.It is clearly stated in the PBC Working Conference in January 2019 that the PBC shall implement solid monetary policy,strengthen market expectation guidance,enhance policy communication and coordination,balance between aggregate and structural indicators,and dredge monetary policy transmission channels.Against this background,it is of great significance to research on effectiveness of central bank communication during the transition period of monetary policy framework.Based on knowledge of macroeconomics,finance,statistics and econometrics,this paper followsthe methodology of “theoretical framework-realistic basis-empirical analysis-policy recommendations".In terms of China’s monetary policy framework transformation and central bank communication effectiveness,the following questions are specifically answered: 1)What is the connotation and measurement standard of central bank communication effectiveness in theory? What is the transmission mechanism of central bank communication effectiveness? What role does central bank communication play in monetary policy framework? 2)In practice,what is the reference significance of central bank communication practice in major western countries to China? In terms of monetary policy framework transition,what are the characteristics of China’s monetary policy? What are the specific practices adopted by the PBC? What is the problem? 3)How effective is the communication of the PBC? From a global perspective,the effectiveness of central bank communication is mainly reflects on financial markets and inflation expectations.Can the PBC’s communication affect the financial market and guide the price of financial assets such as interest rates,exchange rates and bond yields? What is the direction of development? Can PBC’s communication guide inflation expectations? Finally,on the basis of above analysis,this paper proposes the measures that China could take to strengthen central bank communication and improve the effectiveness of communication.From the current point of view,these issues have aroused widespread concern in the academic and practical circles,but the previous literature has not yet given a sufficiently clear answer.There’re eight chapters in this paper.Firstly,this paper analyses the theoretical basis and internal mechanism of the effectiveness of central bank communication.Conceptually,the central bank communication refers to the process in which the central banks publicize the information such as monetary policy objectives,monetary policy strategies,economic prospects and future monetary policy intentions,seeks the understanding and identification of the information receiver,obtains the feedback,and further adjusts the communication behavior accordingly.So how to measure the effectiveness of central bank communication? By carefully combing previous literature on the effectiveness of communication,this paper concludes three pillars of evaluating the effectiveness of communication: whether financial markets develop in the way expected by the central bank,and reduce the uncertainty of financial markets? Can central banks guide the public’s inflation expectations by strengthening communication,so as to promote the realization of the ultimate goals of monetary policy? Through central bank communication,can the public enhance their recognition and understanding of the overall economic and financial operation and the trend of monetary policy,better off their prediction of monetary policy trend,and improve the predictability of monetary policy?Besides,this paper theoretically defines the communication transmission mechanism of central banks and its role in the monetary policy framework.The transmission mechanism of central bank communication is that the central bank sends out signals to the public,the public who receive information makes investment and consumption decisions through information coordinationand then affects the total economic output.At the same time,the relevant decision-making information of the public is fed back to central banks,and central banks will revise the communication behavior accordingly.This is a process of information sending-synergy-feedback.A theoretical model can tell that central bank communication is indispensable in a country’s monetary policy framework.Particularly,when the monetary policy framework turns to price-oriented regulation,interest rate transmission mechanism becomes the main channel.Convergence of short-term interest rate to the central bank’s expectation has become the core part of this mechanism.The central bank communication plays an important role in achieving this core part.Secondly,this paper studies the practical experience of central bank communication.On the one hand,on basis of sorting out and summarizing the latest communication practice of major western countries in the post-financial crisis era,this paper finds that although monetary policy frameworks adopted by monetary authorities in different countries or regions are divergent,monetary authorities in various countries pay great attention to communication and guidance of public expectations.Central bank communication has become an indispensable part of the monetary policy toolkit.Nowadays,the content of central bank communication is more specific,the frequency has increased significantly,the form becomes more diversified,and the communication system begins to be established.In terms of effect,central banks can influence the asset price trend and inflation expectation of financial market.On the other hand,this paper systematically examines the relevant characteristics of China’s monetary policy framework transformation,and analyses status and existing problems of the PBC’s communication.This paper points out that the PBC is facing multiple difficulties,such as grasping the opportunity of communication and choosing the content for communication while having limited independence.Although the PBC has taken various methods to strengthen communication,there is still room for transparency of monetary policy,content of communication and global influence.Thirdly,based on analysis of the PBC’s communication practice,this paper looks into effectiveness empirically.On the empirical analysis ofimpact on financial market,we find that: 1)To some extent,the financial market "listens" the voice of the central bank,the impact is significant on the volatility of short-term interest rates,less significant on the medium and long-term interest rate volatility and exchange rate,and not noticeable on bond yields and stock market.2)The financial market basically "understands" the voice of the central bank.When the central bank sends a tightening signal,the market interest rate generally goes up,vice versa.However,minority of interest rate fluctuations are also inconsistent with intentions of policy communication.3)Central bank communication can play a certain role in structural adjustment with monetary policy tools.4)Oral communication and written communication have different impacts on different financial markets.On the other hand,this paper analyses the role of PBC’s communication in inflation expectation guidance.Empirical test results show that the PBC’s communication has a certain impact on expected inflation real inflation and economic growth,but the impact is limited.Monetary policy intervention is the main way toguide economic growth and inflation in China.The PBC still need to improve expectation management.To sum up,considering theoretical analysis,international experience and empirical analysis above,and combining characteristics during transition period of the monetary policy framework,this paper propose feasible policy recommendations for short-term,medium-term and long-term.In the short term,the PBC should focus on increasing the transparency of monetary policy with actions like increasing the content of communication.In the medium term,it is advisable to gradually build a monetary policy framework based on price-oriented regulation,concentrate on price stability and economic growth,eliminate M2 from intermediary goal of monetary policy,accelerate the interest rate reform,and announce the policy interest rate and interest rate corridor when appropriate.In the long run,it is essential to improve the monetary policy independence of the PBC,and legally endure the PBC Monetary Policy Committee with the decision-making power.There are four highlights of this paper.Firstly,this paper innovatively studies the effectiveness of central bank communication in the context of monetary policy framework transition,and discuss role of central bank communication on financial market and inflation expectation in price-oriented regulations.At present,China’s quantitative monetary policy tools and price-oriented instruments coexist,tracks of market interest rates and credit market benchmarks coexist.Because central bank is focusing on promote DR007(seven-day pledge repo rate of deposit financial institutions)as a market benchmark interest rate,this paper considers impact of central bank communication on DR007 in an EGARCH model when analyzing the impact of central bank communication on financial market.Meanwhile,based on the previous literature using the deposit and loan benchmarks and deposit reserve ratio as policy variables,in the S-VAR model analyzing impact of PBC’s communication on inflation expectation,this paper creatively chose 7-day reverse repo rate of the open market operation as represent variables of price-oriented monetary policy,and introduce exchange rate variables to control the impact of international economic and financial factors,thus making the empirical test results of this paper closer to the actual situation of the current Chinese monetary policy framework transition.Secondly,this paper principally and systematically studies the transmission mechanism of central bank communication.The previous research believes that the central bank communication mainly has two stages,i.e.information transmission and information feedback.Based on previous literature,this paper emphasizes the important role of information coordination in the transmission mechanism,which is beneficial in constructing analytical framework for central bank communication effectiveness and conduction mechanisms.Furthermore,this paper innovatively summarizing the three pillars of evaluating the effectiveness of communication by reviewing previous literature on communication effectiveness.Thirdly,this paper proposes feasible policy suggestions for improving central bank communication from short-term,medium-term and long-term perspectives.Considering that the current monetary policy tools are innovative and complex,it is necessary to supplement appropriate communication means in appropriate time,enrich communication content and guide expectations.Meanwile,the branches of the PBC should play an important role in guiding the expectations.