In this paper, we study the role played by central bank communication in monetary policy transmission. We employ the Swiss Economic Institute’s Monetary Policy Communicator to measure the future stance of the European Central Bank’s monetary policy. Our results indicate, first, that communication has an influence on inflation (expectations) similar to that of actual target rate changes. Communication also plays a noticeable role in the transmission of monetary policy to output. Consequently, future work on monetary policy transmission should incorporate both a short-term interest rate and a communication indicator. A second finding is that the monetary policy transmission mechanism changed during the financial crisis as the overall effect of monetary policy on (expected) inflation and output is weaker and of shorter duration during this period compared to the overall sample period.

In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks’ efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain)

We study how financial market participants process news from four major central banks—the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed)—using a novel survey of 195 financial market participants from around the world. Our results indicate that, first, respondents rely more on media reports of central bank events than they do on self-monitoring. The only exceptions are interest rate decisions in the respondent’s home region. In general, the Fed is watched most closely, followed by the ECB, the BoJ, and the BoE. Second, ordered probit estimations reveal that the perceived reliability of media coverage is negatively associated with degree of self-monitoring and positively related to the probability of using media reports, particularly in the case of asset managers. The perceived importance of central bank events is positively related to the degree of self-monitoring in the case of traders. Finally, portfolio managers tend to self-monitor their home central bank significantly more often than other central banks.