Three essays on monetary policy
expectations, communication and transparency
The conduct of monetary policy has greatly evolved in the past two decades, particularly because monetary authorities have become more transparent and are communicating monetary policy issues to the public more than before. Most central banks have reformed into either de jure or de facto inflation targeting frameworks, with intensified efforts to influence inflation expectations. The discussion in this dissertation is three-pronged. Chapter 1 explores the behavioral aspect of economic agents in forming inflation expectations by utilizing threshold models and time-varying Granger causality techniques in the context of lag-augmented vector autoregressive models to establish the extent to which inflation expectations may have a non-linear relationship with their predictors and whether inflation expectations can be adequately predicted. Chapter 2 discusses monetary policy communication, precisely by utilizing the text mining algorithms to extract the levels of readability, complexity, and sentiment contained in the monetary policy statements and further test how these indicators are related to financial market variables’ volatilities. Finally, chapter 3 attempts to understand how monetary policy transparency may affect the stability of the banking system. I find that economic agents might not revise their inflation expectations until the inflation target is missed beyond some threshold. I further find that credibility of the central bank, changes in the policy rate and missing of the inflation target by the central bank may provide insights on how economic agents would form their expectations about inflation in the future. I also find that small misses of inflation target do not trigger the revision of inflation expectations by the economic agents. There is evidence suggesting that the readability and complexity of monetary policy statements may affect exchange rate volatility in developing countries, and the tone of a central bank's statements regarding overall macroeconomic conditions matters for financial market volatility. Finally, I find evidence to suggest that banking industry stability could be influenced by how transparent a central bank is, particularly on issues related to explicit announcement of policy rules, provision of a comprehensive account of monetary policy deliberations, and disclosure of how each decision was reached.
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