Central Bank Communication on Financial Stability.pdfVIP

The Economic Journal, 124 June , 701–734. Doi: 10.1111/ecoj.12039 ? 2013 The Author s . The Economic Journal ? 2013 Royal Economic Society. Published by John Wiley Sons, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. CENTRAL BANK COMMUNICATION ON FINANCIAL STABILITY* Benjamin Born, Michael Ehrmann and Marcel Fratzscher Central banks regularly communicate about ?nancial stability issues. This article asks how such communications affect ?nancial markets, based on a unique dataset covering more than 1,000 releases of Financial Stability Reports FSRs and speeches by 37 central banks over the past 14 years. The ?ndings suggest that optimistic FSRs lead to signi?cant and potentially long-lasting positive abnormal stock market returns, whereas no such effect is found for pessimistic FSRs. Speeches and interviews, in contrast, have smaller effects on market returns during tranquil times but have been in?uential during the 2007– 10 global ?nancial crisis. The global ?nancial crisis has triggered heated discussions on how best to achieve ?nancial stability in the future. An important role in that regard has been assigned to central banks, many of which have already had or have been given explicit ?nancial stability mandates. In light of this, a large number of central banks have communicated extensively on ?nancial stability-related matters, e.g. through the publication of Financial Stability Reports FSRs and ?nancial stability-related speeches and interviews. Such communications have at times triggered substantial reactions in ?nancial markets. To give a prominent example, on 5 December, 1996, Alan Greenspan, then chairman of the Federal Open Markets Committee FOMC , said Clearly, sustained low in?ation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in t