Assessing the Role of Monetary Policy Transparency in Enhancing Financial Market Predictability and Investor Confidence

Posted: Feb 28, 2024

• Jack Davis
• Jack Mitchell
• Jack Roberts

Abstract

The evolution of central banking over recent decades has witnessed a profound shift toward greater transparency in monetary policy communications. This transformation represents a fundamental departure from the historical tradition of central bank secrecy and ambiguity. The theoretical underpinnings of this shift rest on the premise that transparent communication enhances market efficiency, reduces uncertainty, and strengthens the transmission mechanism of monetary policy. However, the empirical relationship between transparency and its purported benefits remains inadequately understood, with conflicting evidence emerging from various financial contexts. This research addresses critical gaps in the existing literature by developing a comprehensive computational framework to assess how different dimensions of monetary policy transparency influence financial market behavior and investor psychology. Traditional approaches have typically employed simplified transparency indices or focused on single communication channels, thereby overlooking the complex, multi-faceted nature of modern central bank communications. Our study introduces a novel methodology that captures the richness and nuance of transparency across multiple communication modalities and temporal frequencies.