We examine the European Central Bank’s ad-hoc communication and explore how it informs future monetary policy decisions. Using the rich dataset of the inter-meeting verbal communication by the members of the European Central Bank’s Governing Council between 2008 and 2016, we construct a measure of communication evaluating its inclination towards easing, tightening or maintaining the monetary policy stance. We find that this measure provides useful additional information about future monetary policy decisions, even when we control for market-based interest rate expectations and lagged decisions. Our results also suggest that, in particular, communication related to conventional measures and/or by the ECB President explain the future ECB rate changes well. All aforementioned results hold also in the environment of the zero lower bound. Overall, these results point to the importance of transparent communication in understanding the future course of monetary policy.

Introduction

Central banks currently use a wide set of communication tools to manage financial markets’ expectations, and the use of these tools has become more intensive during the financial crisis (Blinder et al., 2017). Many central banks started operating in ultra-low interest rate environments and complemented their conventional monetary policy with several unconventional measures, such as asset purchases and forward guidance. As a result, the content of central bank communication has broadened, and central banks have started regularly communicating their views about asset purchases, liquidity conditions or interest rate commitments when referring to the stance of monetary policy. In this paper, we examine whether central bank communication contributed to better monetary policy predictability in the (post)-crisis period (2008–۲۰۱۶) using detailed data on the European Central Bank’s (ECB) verbal communication.1 To our knowledge, this is a novel examination because the empirical literature investigating the effect of communication on monetary policy predictability has largely focused on examining how the voting records and minutes from monetary policy meetings are informative about the future course of monetary policy (Gerlach-Kristen, 2004; Horvath et al., 2012; El-Shagi and Jung, 2015; Jung, 2016).