The clarity of monetary policy communication and financial market volatility in developing economies

Abstract

This study investigates the effect of the clarity of monetary policy statements (MPSs) on financial market volatilities by employing linguistic analysis and a panel fixed effects estimator for a newly built dataset drawn from the MPSs of 21 developing countries. Our results show that MPS clarity, measured by complexity and readability indices, negatively affects foreign exchange rate volatility, a key policy variable in developing economies, suggesting that clear central bank communication can reduce financial market volatility. Given the low literacy levels in developing countries, their central banks should make an extra effort to write statements that are easy to comprehend.