Is central bank communication really informative when forecasting interest rate decisions? New evidence based on a Taylor rule model for the ECB by Jan-Egbert Sturm and Jakob de Haan Discussion by Michał Brzoza-Brzezina National Bank of Poland Communication and Monetary Policy April 2009 Waterloo, Ontario

2 The paper (1) Examines whether information provided by the ECB adds information not provided by standard macroeconomic variables Important question – in the rush to transparency central banks should disseminate information efficiently Supplements the existing literature on effectiveness of central bank communication

3 The paper (2) Collect inflation and output forecast from SPF, Run forward-looking Taylor rule regression (both variables significant), Add ECB communication indicators to the regression, Communication indicators are significant while macro forecast becomes (partly) insignificant.

4 Discussion The devil is in the details. The details are in the footnotes. Discussion concentrates on 2 footnotes: Footnote 4: Data restrictions force us to use a lead [in the Taylor rule] of 12 months. Footnote 6: To convert the reported growth rates into monthly moving figures, we take as the 12-month forecast the weighted average of the forecast for the current and the following year, where the weights are x/12 for the x remaining months in the current year and (12-x)/12 for the following years forecast.

5 Footnote 6: weighted average SPF for the euro area collects inflation and output data for current and next year But do professional forecasters only forecast at low (annual) frequency? What if they have higher frequency models? Then forecasters average the forecast to annual frequency and the authors use it to deduce 12- month forecast (weighted average) But information is lost – the paper forecast differs from the true PF forecast.

6 Simulation - assumptions Checking the possible consequences Assume: -ECB and PF have the same information and (high frequency) forecast -But we observe only annual forecast (as in SPF) -ECB President announces the 12-month forecast during press conference

7 Simulation - procedure Inflation and output series from AR(1) Interest rate from Taylor rule PF make high frequency forecast but show annual average in SPF 12-month forecast calculated as in the paper Regress interest rate on this forecast ECB President announces 12-month forecast Add this forecast to the regression

8 Regression 1 Interest rate regressed on the paper forecast (Table 2 in the paper) We get the Taylor rule coefficients

9 Regression 2 ECB forecast added to the regression (Table 3 in the paper) Paper forecast looses significance. ECB forecast matters. But this was by assumption common knowledge

10 Footnote 6: summary Important information may be lost in the forecast averaging procedure Information that is not new may seem significant Possible solution: -Bloomberg, Reuters: quarterly forecasts -Inflation expectations from index linked bonds

11 Footnote 4: 12-month horizon Similar problem may emerge if we look at the wrong horizon Any evidence on the horizon central banks look at? Very early results (for BoE) Gap between forecasted inflation and target matters most for lead of 10 quarters Forecasted GDP growth matters most for lead of 4 quarters