RDP 2004-10: News and Interest Rate Expectations: A Study of Six Central Banks 5. Conclusions

In this paper we have analysed the effect of news relating to the expected path of monetary policy on interest rate futures. We consider four types of news: domestic macroeconomic news, foreign news, monetary policy surprises and central bank communication. The effect of these types of news on daily changes in interest rate futures was estimated using an EGARCH model for a panel of economies. We find that interest rate expectations respond to both macroeconomic (domestic and foreign) and policy news, although the response to macroeconomic news is larger, especially once we include foreign news. Overall, the results suggest that the impact of the RBA's communication policy is in line with other major central banks, and significantly influences (and informs) expectations of future monetary policy.

Previous work has found that the predictability of monetary policy is very similar for major central banks including the RBA, despite differences in the communication frameworks (see Coppel and Connolly 2003). This implies that central banks provide information on the future path of monetary policy to a very similar extent. Our study could shed light on some factors underlying this similarity.

The channels of communication that are found to most influence expectations – commentary with rate decisions, monetary policy reports and parliamentary hearings – tend to be used by all the central banks in our study. Interestingly, communication events that occur more frequently tend to have less effect on expectations of future policy. However, this is consistent with the view that more frequent channels allow the central bank to convey information gradually, at the same time as it learns about changes in current and expected future conditions for monetary policy.

The individual economy results reflect small differences in the structures of central bank communication policies. Some channels, such as minutes of meetings, have significant effects in some economies but not in others. However, these results do not imply that some central banks convey ‘more’ information than others. They merely suggest that central banks can use different channels to convey the same information.