Effectiveness of monetary policy communication in Indonesia and Thailand S. Sahminan (Bank of Indonesia) Discussion – P. Reding (University of Namur)

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Presentation transcript:

Effectiveness of monetary policy communication in Indonesia and Thailand S. Sahminan (Bank of Indonesia) Discussion – P. Reding (University of Namur)

Interest of Paper  Additional light on question “Does transparency matter for MP ?”  Special focus on two EM which are also Inflation targeters : Indonesia (since July 2005) & Thailand (since 2000); During tranquil (non crisis) period :  Empirical study allowing comparison with results for industrial countries (Ehrmann- Fratzscher 2007)

Question addressed = effectiveness of MP communciation  Focus on MP communication, measured as : Official statements after meetings Inter-meeting statements by members of the Board Coded as ‘tight’ – ‘neutral’ – ‘loose’  Effectiveness of MP communication : 3 relevant perspectives : Is MP communication informative ? Does the CB do as it had said it would do ? Is MP communication effective as a transmission channel of MP ? Is there « internal consistency » in MP communication?

Effectiveness as transmission channel (1)  Only effect on market interest rates (yield curve) Conditional mean Conditional volatility  Why not also on exchange rates? At least as important, especially in open EM with still not fully developped financial markets ?  Direct effect on inflation expectations ?

Effectiveness as transmission channel (2)  Econometric spécification (E-Garch)  r t = daily changes in interbank rates & implied forward rates  M +, M 0, M - and I +, I 0, I - the MP communication variables

Effectiveness as transmission channel (3) : Results  MP announcements do move interest rates in the right direction in Indonesia and Thailand  Effects on r t ( μ i ; θ i ) are larger than for Fed, Be and ECB (5 to 10 Bp vs 1.5 to 2.5 BP)  Effects on σ 2 t ( τ i ) : MP announcements increase conditional volatility of r t in Thailand and Indonesia (after July 2005)

Effectiveness as transmission channel (4) : Questions  Control variables Policy rate (p t ) : why ? Should it not be orthogonal to MP announcement variable ? Macro news variables (GDP and inflation) : if purpose in to control for MP annoucement as a reaction to news, why not also a 0, 1, -1 coding (neutral, good, bad news)

Effectiveness as transmission channel (5) : Questions  Temporary versus permanent effets of MP announcements : difficult to assess as dynamics not reported Especially crucial for results for conditional volatility (if autoregressive coefficient large) – see alternative specification par Melvin et al. 2009

Effectiveness as transmission channel (6) : Questions  Issue of exclusive focus on i-rates as transmission channel : why not joint estimation with exchange rate estimation (Bi- variate Garch) ?

Effectiveness as transmission channel (7) : Questions  Evaluating the impact of a shift to IT in Indonesia in July 2005 : Based on re- estimating on a reduced sample period would be worth a more formal testing procedure S: BIS (2008) WP 253

Predictability: Does the CB do as it had said it would do ? - Indonesia

Reconcile with econometric results ? – only loose (or neutral) MP announcements matter for markets and have some predictive power