The Ability of the Comunicational Bias to Predict the Direction of Monetary Policy Rates in an Emerging Economy

• Activity Number: 267
• Type: Contributed
• Date/Time: Tuesday, August 4, 2009 : 8:30 AM to 10:20 AM
• Sponsor: Business and Economic Statistics Section
• Author(s): Pablo M. Pincheira*+
• Companies: Central Bank of Chile
• Keywords: Forecasting ; Monetary Policy ; Communicational Bias ; Predictive Ability ; Emerging Economy ; Interest Rates

Abstract

This paper evaluates the forecasting performance of one of the most natural future-signaling communicational tools used by central banks: the Communicational Bias (CB) contained in press releases published immediately after monetary policy meetings. CB is intended to pin down expectations about the most likely evolution of future interest rates. In this paper we construct a novel database using the interpretation given to these press releases by actual policymakers from an emerging economy. With an out-of-sample exercise we evaluate the ability of the CB to predict the direction of change of future monetary policy rates comparing it to traditional benchmarks. Our results indicate that the CB has useful information to predict the future direction of monetary policy rates at several horizons. In particular, the CB outperforms the predictive ability of the random-walk model.