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This document from the XXVI Meeting of the Central Bank Researchers Network at CEMLA explores the relationship between monetary policy communication tone and inflation expectations. The authors, Carotta, Mello, and Ponce from Banco Central del Uruguay, discuss the importance of effective and perceived tone in anchoring inflation expectations and propose new indicators for perceived tone and readability. The study is based on a survey of BCU members and advanced Economics students, and the findings suggest that both tone and readability have a statistically significant impact on inflation expectations.
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XXVI Meeting of the Central Bank Researchers Network CEMLA
Gianni Carotta Miguel Mello Jorge Ponce
Banco Central del Uruguay
November 2021
The views expressed therein are those of the authors and do not necessarily represent the opinion of the Banco Central del Uruguay.
Contribute evidence on the impact of monetary policy communication on inflation expectations of the general public (firms): I (^) A negative and statistically significant relationship between the tone of monetary policy communication and inflation expectations I (^) On top of the tone, the readability of monetary policy communication has a statistically significant marginal contribution To so doing: I (^) Propose a new perceived tone indicator by implementing a survey I (^) Compute readability and perspicuity indicators of monetary policy statements =⇒ Efforts to continuing making monetary policy communication more accessible to the general public may be worth
We propose an indicator of the tone of monetary policy communication that accounts for the perception of readers. The indicator of perceived tone does not focus on the contain of the communications but on the perception or sentiment of the readers. If agents were totally rational, there should be no discrepancies between the indicators. But they aren’t. Individuals may slowly modify their perceptions by discarding any new information that is not aligned with their previous beliefs (Rabin 1993), They may suffer a confirmation bias by giving more weight to new information that reaffirms their previous thought (Tversky and Kahneman 1973). The set of prior information available to an agent can affect the interpretation of the communications (Babcock and Loewenstein 1997).
Distributed in two batches in a three-month period, between September and November 2020. BCU members and advanced Economics students. Participation was voluntary. The text of the monetary policy releases was divided into sentences, and each question contains a single sentence. The respondents were asked to classify according to the tone perceived as : ‘contractive’, ‘expansive’ or ‘neutral’ or ‘does not apply’. Questions (a sentence of the 586 for all the statements) are assigned randomly. Background information: Inflation, GDP growth, policy rate, unemployment. 49 respondents 1.310 responses
Figure: Perceived tone of monetary policy communication
Figure: Perceived tone vs effective tone of communication
Readability = 206, 84 − 0 , 60 × P − 1 , 02 × F, (1) where P is the average number of syllables per 100 words and F is the average number of words per phrase.
Index Grade Style 0-30 Professional Very difficult 30-50 University Difficult 50-60 High school Somewhat difficult 60-70 7 u 8 Normal 70-80 6 Somewhat easy 80-90 5 Easy 90-100 4 Very easy
Figure: Readibility of monetary policy communication using Fern´andez-Huerta (1959)
The reading of the monetary policy communication has been made simpler, although it persists at a high level of difficulty.
Pazos (1993) focus on the clarity and transparency of the text. P erspicuity = 207 −
where S is the number of syllables, P is the number of words, and F is the number of phrases. Index Grade Style Type 0-15 Professional Very difficult Scientific 16-35 Graduate student
Difficult Technical
36-50 University Somewhat difficult Literature 51-65 Popular Normal Media 66-75 12 Somewhat easy Novels 76-85 11 Easy News 86-100 6 a 10 Very easy Comics
Figure: Perspicuity of monetary policy communication using Pazos (1993)
The reading clarity in communication has improved, but still remains at ”difficult” or ”somewhat difficult” levels.
Was monthly sent to 500 firms, with an average response ratio of 77% since October 2009, and a minimum response ratio of 44%. 591 companies throughout the entire period were covered by the sample, between October 2009 and March 2020. It’s representative of all the private non-financial nor agricultural firms with 50 employees or more. 3 different horizons: the current year, the next 12 months and the next 24 months.Table 1: Firms’ distribution by sectors: sample and population (%) Sector Sample Population Manufacturing 41.48 46. Trade & commerce 29.99 23. Services 18.40 14. Health 4.47 11. Primary activities 2.36 1. Education 1.99 1. Utilities 0.58 0.
Inflation and expectations are anchored in a higher level, above the target almost all the period of analysis.
