Central Bank Communication on Fiscal Policy

This dissertation explores how central bank communication influences financial markets, focusing on the transmission of information through policy statements, program announcements, and forward guidance. By combining event-study methodologies, yield curve modeling, and volatility analysis, the research investigates how financial market participants interpret and react to central bank messages in both the United States and the Euro area. The analysis covers bond yields, stock market volatility, and broader implications for monetary transmission under different policy environments. The first empirical study examines yield reactions to forward guidance in the United States. Using high-frequency data surrounding Federal Reserve announcements, it quantifies the immediate impact of forward-looking policy statements on Treasury yields across maturities. Employing an event-study framework and regression-based sensitivity analysis, the study finds that forward guidance substantially alters market expectations of the future policy rate path. Short- and medium-term maturities exhibit the strongest yield responses, indicating that communication about the timing and persistence of policy normalization is a critical driver of bond market pricing. The findings confirm that the tone, clarity, and credibility of central bank statements shape the effectiveness of forward guidance as a monetary policy tool. The second part extends the analysis to the Euro area, investigating yield reactions to European Central Bank (ECB) program announcements, such as the Securities Markets Programme (SMP), the Outright Monetary Transactions (OMT), and the Asset Purchase Programme (APP). Through a carefully constructed event dataset and multiple regression specifications, the study isolates announcement effects on sovereign yields across member states. Results show significant yield compression following announcements of unconventional policy programs, particularly in stressed sovereign markets. Panel regressions further reveal that countries with higher yield spreads experience stronger reactions, confirming the credibility and signaling effects of ECB interventions. Moreover, robustness checks confirm that program-specific and timing-related factors play a central role in determining the magnitude of market responses. The third empirical study investigates how ECB communication affects the entire yield curve. It develops a model linking communication tone, timing, and policy content to shifts in the level, slope, and curvature of the Euro area yield curve. The analysis demonstrates that clear and consistent communication reduces uncertainty in expectations and flattens the yield curve, signaling confidence in policy continuity. Conversely, ambiguous or surprise statements tend to steepen the curve and increase market volatility. These results emphasize the role of transparency and consistency in anchoring interest rate expectations, particularly in periods of unconventional monetary policy. The fourth study focuses on the effects of ECB announcements on stock market volatility. Utilizing multiple measures—high-frequency realized volatility, daily price ranges, future and implied volatility indices—the research examines how equity markets respond to policy communications over time. The results indicate that monetary policy announcements have statistically significant effects on volatility, especially during crisis and post-crisis periods. Positive announcements (e.g., expansionary or supportive policies) tend to reduce volatility, while negative or tightening-related communications heighten it. The study also explores asymmetric effects, persistence over subsequent days, and the weighting of announcement content, revealing that market sensitivity depends on both the perceived economic outlook and the credibility of policy measures. Across all four studies, the findings collectively underscore that central bank communication is a powerful instrument of monetary policy—capable of moving markets even in the absence of traditional rate changes. The magnitude and direction of financial market reactions depend on message clarity, policy credibility, and prevailing market conditions. The research highlights that well-calibrated communication enhances the predictability of monetary policy, stabilizes expectations, and reduces excess volatility. In contrast, ambiguity or inconsistency can amplify uncertainty and undermine transmission effectiveness. The dissertation contributes to the literature by providing a comprehensive cross-market and cross-institutional analysis of how communication serves as a vital, yet complex, channel of modern monetary policy in both normal and crisis periods.

Under ordinary circumstances, the fiscal implications of central bank policies tend to be seen as relatively minor and escape close scrutiny. The global financial crisis of 2008, however, demanded an extraordinary response by central banks which brought to light the immense power of central bank balance sheet policies as well as their major fiscal implications. Once the zero lower bound on interest rates is reached, expanding a central bank's balance sheet becomes the central instrument for providing additional monetary policy accommodation. However, with interest rates near zero, the line separating fiscal and monetary policy is blurred. Furthermore, discretionary decisions associated with asset purchases and liquidity provision, as well as with lender-of-last-resort operations benefiting private entities, can have major distributional effects that are ordinarily associated with fiscal policy. In the euro area, discretionary central bank decisions can have immense distributional effects across member states. However, decisions of this nature are incompatible with the role of unelected officials in democratic societies. Drawing on the response to the crisis by the Federal Reserve and the ECB, this paper explores the tensions arising from central bank balance sheet policies and addresses pertinent questions about the governance and accountability of independent central banks in a democratic society.

Recent events have highlighted the potential importance of nonlinear efiects of flscal variables (notably debt and deflcits) on interest rates: While in times when government solvency is not a concern the standard crowding-out efiects are of moderate magnitude, in times when default risk becomes an issue the interest rate efiects can become very large. This paper provides new evidence on the magnitude of these efiects. For the case when default risk is not a concern, it uses an arbitrage-free term structure model to estimate the dynamic efiects of flscal policy shocks on interest rates along the entire maturity spectrum. For the case when default risk becomes a concern (thereby violating a central assumption of the term structure model), I present evidence based on EMU government bond spread regressions on time-varying efiects of national flscal policies on spreads as well as the time-varying sensitivity of yield spreads to international risk aversion as a function of the state of flscal policy. JEL classiflcation: E6, H6.

Objective: The objective of the article is to determine whether the policy of the National Bank of Poland (NBP) as conducted in recent years may be the basis for bringing the president of the NBP before the State Tribunal for violating the Constitution of the Republic of Poland. Research Design & Methods: The independence of the central bank is of undoubted value in terms of controlling the price level (inflation), but the ban on supporting the government during periods of financial crisis, for example the COVID-19 pandemic crisis, cannot be inviolable. In the detailed analysis of the subject literature, the significance of the activities of other central banks, primarily the European Central Bank, in 2007, is included. An analysis of the NBP’s activities during the COVID-19 pandemic was carried out, with particular emphasis on inflation, independence from the government, communication with the public, and financing the government’s borrowing needs. Findings: Analysis of allegations regarding the NBP policy, including the validity of criticism (inflation). However, there are a number of counter-arguments against taking such drastic steps against the president of the National Bank of Poland, whose actions resulted in government support (redemption launched on the secondary market) during the COVID-19 pandemic period, for violating the Constitution. Implications/Recommendations: It is necessary to introduce a provision into the Constitution allowing the NBP to purchase treasury bonds on the secondary market during periods of extraordinary difficulties on financial markets. Consideration should be given to changing the method of appointing members of the Monetary Policy Council (MPC) in order to prevent a single political grouping exercising political power for more than one term. Contribution: The policies of many central banks in the world, including the ECB, the Fed, the Bank of England, and others, confirm the hypothesis that central banks cannot be (and are not) inactive during periods of crisis, in which the fiscal policy resources available to the government are insufficient. The paper draws particular attention to the need for a pragmatic approach in Poland in extreme/crisis conditions. It also points out the need for institutional coordination of fiscal and monetary policy at the Financial Stability Committee.

Since 2007, central banks of industrialized countries have counteracted financial instability, recession, and deflationary risks with unprecedented monetary policy operations. While generally regarded as successful, these measures also led to an exceptional increase in the size of central bank balance sheets. The book first introduces the subject by explaining monetary policy operations in normal times, including the key instruments (open market operations, standing facilities, reserve requirements, and the collateral framework). Second, the book reviews the basic mechanics of financial crises as they have hit economies many times. The book then explains what central banks need to do to when financial markets and banks are impaired to fulfil their monetary policy and financial stability mandates. Besides demonstrating the need for non-conventional monetary policy measures, the book also highlights their dangers, such as moral hazard and increased central bank risk taking. The book draws a number of lessons from the crisis on non-conventional monetary policy operations, assessing what measures have worked well, and how a framework should be designed in future normal times such as to contribute to make financial crises less likely. Central bank monetary policy operations have traditionally been considered as a matter of practice, while the macroeconomic modelling of the transmission mechanism of monetary policy is regarded as a discipline relying on substantial theory ('monetary economics'). However, monetary policy operations can equally benefit from a theory, and from a normative framework to guide policy choices.

Monetary policy transmission in vector autoregressions: A new approach using central bank communication

I. INTRODUCTION Over the past decade, the policy statements issued by the Federal Open Market Committee (FOMC) after each meeting have become an increasingly important element of monetary policy-making in the United States. These statements provide about the Fed's view on economic outlook, key forces that are likely to shape future developments and potential implications for monetary policy. Therefore, on policy announcement days, market participants monitor closely not only what the Fed does (interest rate decisions), but also what it says (FOMC statements). One striking example is the policy announcement of January 28, 2004, when the Fed kept its target rate unchanged (a move that was widely anticipated by the market), but unexpectedly altered the wording of the statement, causing one of the largest reactions on record in financial markets. Theoretically, central bank communication should not matter to market participants if the central bank is committed to an unchanged policy rule and the public has a perfect understanding of the rule, the objectives, and the thinking of the monetary authority. In reality, the central bank cannot possibly commit to an inflexible policy rule given that the number of contingent states is infinite (Blinder et al. 2008). Consequently, the public needs to estimate the policy function and because the central bank invariably knows more about its future moves, the dissemination of this is important to market participants. It appears that, at least in practice, market participants should pay attention to the content of FOMC statements. However, more does not always translate to greater clarity and ill-conceived statements confuse rather than enlighten. Kahneman (2003) argues that there are limits to how much can be digested effectively and more may reduce common understanding among market participants. Moreover, central bank communication may be welfare reducing if agents place too much weight on policy statements and too little on their own information, thus crowding-out private beliefs which are an important source of for the Fed (Amato, Morris, and Shin 2002; Morris and Shin 2002). In addition, the Fed may increase noise if it communicates on which it has imprecise knowledge--such as on future economic developments rather than the policy path. This paper contributes to a young but rapidly growing literature on central bank communication by evaluating the impact of the content of FOMC statements on the level and volatility of Treasuries and stock returns. To measure the information content, we assess the consensus view about the importance of the statements by collecting stories from three major sources right after a policy meeting. This allows us to group statements into two broad categories, and uninfor-mative, with informative statements delivering important which was not previously anticipated by the consensus. A priori, we expect asset prices to respond asymmetrically to the type of information, with informative statements generating a larger response. Figure 1 seems to confirm this idea: the chart plots changes in S&P 500 and Treasury yields around policy announcements with solid bars representing dates when the statement was informative. As seen, the largest asset price changes typically occur when a statement releases important information, which indicates that markets do react to the content. One reason for this oversized response is that the delivered by these statements creates news in the sense that the content is both important and unexpected. If the relates to future monetary policy, about which the Fed is expected to possess superior knowledge, then it should have a considerable impact on asset prices. However, statements routinely transmit the Fed's economic outlook which may be interpreted as an additional policy signal because this outlook presumably shapes the future course of monetary actions. …

Monetary Policy by Committee: Consensus, Chairman Dominance or Simple Majority?

During the past few years, monetary policy communication has become a hot topic in as far as it seems to have become a very relevant way for central banks to guide markets, beyond actual monetary policy decisions. This paper investigates this issue empirically for the case of Chile. More specifically, using data from 2005 to 2014 and a Component GARCH model, we assess whether changes in the communication of the Central Bank of Chile generates in particular a permanent or temporary change in the volatility of interest rates, after controlling for changes in monetary policy instruments. Our results show that the volatility in interest rate futures in Chile's swap markets increases following the Central Bank's communication. However, the impact tends to be temporary instead of permanent and only statistically significant in the pre-crisis period. All in all, our results indicate a reduced relevance of Central Bank's communication for short term swap markets which may reflect that market participants have learned to anticipate changes in monetary policy communication, especially after the global financial crisis.

Enhancing central bank communications using simple and relatable information

Central bank communications are important for guiding expectations. For emerging countries, however, research on this issue is scarce. Because Brazil represents an important emerging country under inflation targeting, this paper studies the influence of monetary policy and central bank communications on the term structure of interest rates in Brazil. The study uses ordinary least squares (ols), generalized method of moments (gmm) and vector autoregresion (var) to examine the direction taken by interest rates when affected by central bank communications and monetary policy. The study finds evidence that because economic agents analyse the minutes of the Monetary Policy Committee meetings, monetary policy and central bank communications significantly influence the process of expectations formation for interest rates with different maturities in Brazil.

The timing of central bank communication

As an expectation management policy, central bank communication can affect corporate market expectations, thus effectively guiding corporate investment and financing behavior. Based on the quarterly data of non-financial listed enterprises from 2007 to 2020, this paper analyzes the relationship between central bank communication and non-financial corporate leverage differentiation. The results show that central bank communication can reduce corporate leverage differentiation. The increase in the degree of bank credit discrimination can further amplify the inhibitory effect of central bank loose communication on the leverage differentiation of non-financial enterprises. The mechanism analysis shows that central bank communication can affect the leverage differentiation of non-financial enterprises by reducing financial mismatches, stabilizing the market expectation mechanism, and reducing managers’ myopia. The results of the extended analysis show that the central bank’s loose communication can inhibit the degree of leverage differentiation between zombie firms and non-zombie firms, and improve the dynamic adjustment speed of corporate capital structure.

The Fiscal-Monetary Policy Mix in the Euro Area: Challenges at the Zero Lower Bound

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