Research On The Effects Of Central Bank Communication On Public Expectations In China

In recent decades, many central banks in developed countries utilized price-based monetary policy tools to regulate their economies. However, interest rates have been dropping to near zero levels due to price decline. Therefore it is becoming increasing difficult for central banks to achieve the desired effect using traditional monetary policy tools, since nominal interest rates cannot be negative. Especially after the subprime crisis broke out. In this situation, central bank communication is becoming an important option for policy makers as a new kind of monetary policy tools. Central banks can exert influence on public expectations by communicating with the public regarding its monetary policy goals, which helps to enhance the accountability, transparency as well as the effectiveness of monetary policies. In recent years, the United States, Britain, Japan and other developed countries frequently have used central bank communication tools to control and regulat e the economy in pursuit of monetary policy goals. With the constant improvement of China’s central bank reputation mechanism, central bank communication in China has for a large part filled in the gap between traditional monetary policy operations. In recent years, China’s central bank has been gradually increasing the number of communications with public. Putting more emphasis on the role that the central bank plays in public expectation management, China’s central bank now considers effective public expectation management to be one of the primary tasks of macroeconomic regulation. Therefore, it is of significant importance to study the impact of central bank communication on the formation of public expectations.The purpose of this dissertation is to improve China’s central bank communication’s strategy and manage public expectation. It follows the research agenda of theoretical framework, realistic foundation, empirical analysis and strategies. It tries to closely link theories with practice to serve policy makers. In doing this, this dissertation first of all comprehensively applies knowledge from various fields of study, including macroeconomics, finance, economics and statistics, to the investigation of the role of central bank communication in the formation of public expectations, and carries out in-depth analysis regarding the inherent mechanism of the expected impact of central bank communication with the public. Second, it studies the timing of the central bank communication and the nonlinear effects of monetary policy between central bank communication and the traditional monetary policy tools under different economic scenarios. This is the foundation and the premise of this dissertation. Finally, the dissertation empirically analyzes the impact of central bank communication on public expectations, including financial market expectations and inflation expectations, thus to investigate the expected impact of China’s central bank communication and provide recommendations of China’s monetary policy regarding public expectations management strategies, and thus provide guidance on selecting the appropriate communication strategy for China’s monetary policy authorities.Firstly, this dissertation does a systematic review on theories of central bank communication and public expectations. It gives a clear definition on central bank communication and public expectations according to the existing literature and China’s current situation, which is the very first question to answer when studying the impact of central bank communication on public expectations. On this basis, it conducts a comprehensive exposition of the theory of central bank communication and the public expectations, including the principal- agent theory, time inconsistency theory, incomplete information theory, public choice theory and static expectations theory, the extrapolation of the expectations theory, adaptive expectations theory and the theory of rational expectations. It later studies the mechanism of the impact of central bank communication on public expectations through multiple levels, then it is proved that the central bank communication plays an important role in the formation of public expectations, including the necessity, pre requisites, monetary policy signaling mechanisms of central bank communication and channels of the impact of central bank communication to public expectations.Secondly, this dissertation studies the timing of central bank communication. This part is the basis for studying the influence of central bank communication on public expectations. It is not possible to fully understand the impact of central bank communication on public expectations without knowing when and how to use central bank communication tools. In recent years, due to the turbulence of China’s macroeconomic situations the central bank has been in a dilemma as to monetary policy implementation, which makes it even more important to study the timing of central bank communications. This dissertation utilizes the LSTVAR model to empirically analyze the opportunity the central bank shall choose to communicate. It also studies central bank communication and the effects of nonlinear monetary policy of the traditional monetary policy tools. It discovers that when the economy is in a rapid growth phase, the central bank should take measures to tighten the money supply to adjust the macro-economy. It also can effectively control inflation. Tools of pricing model with tight monetary policy and cen tral bank communication can become an aid to better stabilize economic growth. When the economy is in a phase of slow growth, the central bank should combine expansionary credit policy with lower interest rates. This can help to achieve the purpose of stimulating economic growth. At this point the central bank communication can control the level of inflation by the expected rate of inflation. China will be in a period of slow economic growth phase, which the central bank should establish monetary policies in a scientific way. The measures should depend on the effects of various monetary policy tools, with reasonable monetary policy tools to improve the effectiveness of monetary policy and prospective.Thirdly, this dissertation studies the impact of central bank communication on financial market expectations. On the basis of the macroeconomic model, it adds central bank communication variables and financial asset price variables, which proves that central bank communication on financial asset prices is influe ntial. In order to better study the impact of central bank communication on asset prices and yields of asset price volatility, this paper uses the EGARCH model for empirical analysis and studies the effects of central bank communication on financial market expectations respectively, including effect analysis of various communication channels to market interest rate expectations, asymmetric effect analysis of communication to market interest rate expectations, the effect analysis of the market interest rate expectations and the impact of communication on spreads before and after the financial crisis. The study discovers that the impact of central bank communication on the financial market expectations is increasing, but there is a certain status with the theoretical expectations gap.Fourthly, the dissertation studies the impact of central bank communication on inflation expectations. This dissertation analyses the influence mechanism of central bank communication on inflation expectations. It uses SVAR model to analyze the role of central bank communication and effectiveness in guiding public expectations of inflation. The study finds that China’s central bank communication has some impact on inflation expectations and the direction of the impact is consisten t to monetary policy intentions, but the effect is not obvious. Effect of oral communication is larger for inflation and inflation expectations relative to written communication. To further test the robustness of SVAR model, this paper uses standard VAR mo del doing the same test and get a similar conclusion.Finally, concerning the conclusions with basic theoretical and empirical analysis, this dissertation presents relevant policy recommendations in three aspects, strengthening the target of central bank communication, further improving the monetary policy framework and improving the institutional arrangement framework of communication, thus to promote the widespread application of China’s central bank communication, and guide public expectations rationally.