Review of Quantitative Finance and Accounting (2020) 54:1195–1219

https://doi.org/10.1007/s11156-019-00822-7

ORIGINAL RESEARCH

How effective is central bank communication in emerging

economies? An empirical analysis of the chinese money
markets responses to the people’s bank of China’s policy
communications

Shiwei Su1 · Ahmad Hassan Ahmad1 · Justine Wood1

Published online: 8 May 2019

© The Author(s) 2019

Abstract
Central banks, in both developed and developing economies, are responding to the
increased demand for transparency in monetary policy formulation and implementation.
It is argued that central bank communication enhances market efficiency and calms down
market volatility. This paper investigates to what extent that the People Bank of China’s
(PBC) communication influences the Chinese money market. Three communication
indexes were constructed and used in the empirical analysis. The findings indicate that the
PBC’s communication has a significant effect on the country’s money market. Secondly,
informal communication appears to be more effective than formal communication. Overall,
the results suggest that policy makers and market observers could pay much more attention
to the informal communications, such as speeches of the bank’s officials, than formal ones,
such as the bank’s report and minutes.

Keywords Central bank communication · Credibility · The PBC · Chinese money market ·
Central bank communication strategies

JEL Classification E52 · E58 · E61

1 Introduction

Central banks’ transparency was not treated with importance until recently, and monetary
policymaking was largely conducted with secrecy. However, since the 1990s, there is a
trend that central banks of the developed economies have been trying to promote trans-
parency in the way monetary policy is conducted. Policy formulation and implementation
are communicated to the economic agents with the view to enhance the effectiveness of

We are grateful to the editor and the anonymous reviewer for their very useful and constructive
comments.

* Ahmad Hassan Ahmad

[email protected]
1
School of Business & Economics, Loughborough University, Leicestershire LE11 3TU, UK

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1196 S. Su et al.

the policy (Geraats 2006). Accordingly, procedural and policy implementation has been
handled with greater transparency than in the past. In line with this, central banks disclose
information to the public on its activities, such as rationales behind policy decisions, eco-
nomic outlook, and monetary policy inclination. This is not only in response to demand for
more transparency by the markets, but authorities are also realising the usefulness of cen-
tral bank communication in promoting the effectiveness of monetary policy.
Central bank communication is the provision of information by central banks to the
public on policy issues that include objectives of monetary policy, etc. via formal and
informal channels, such as written reports, press conferences and speeches (De Haan et al.
2007).1 The important role played by the communication is to manage market expectations,
which matter for financial markets and the entire economy (Blinder 1998). Therefore, well-
communicated information makes markets become more efficient as it reduces uncertainty
and lowers volatility and, therefore, helps central banks achieve part of its monetary policy
objectives (Kahn 2007). This is because provision of accurate and credible information
reduces asymmetric information by signalling the banks’ policies, economic outlook, etc.
These have been considered by researchers (e.g., Andersson et al. 2006; Siklos and Bohl
2007; Lamla and Lein 2011; Neuenkirch 2013) and generally report that communications
have effects on financial markets both in the short and long terms.
Therefore, central bank communication has received increasing attention in both the-
oretical and empirical research. For example, some papers investigate aspects of central
bank communication, such as the economic outlook. (e.g., Rosa 2011; Hayo et al. 2012;
Campbell et al. 2012; Masawi et al. 2018). Another area of communication is the chan-
nels, which investigate the effects of communication strategies (e.g., De Haan 2008; Berger
et al. 2011a, b). The issue of “how-to-communicate” is dealt with as either formal or infor-
mal communication.2 Most of the research, however, focuses on formal communication
such as the minutes and inflation reports (Reeves and Swicki 2007), financial stability
reports (Born et al. 2012) and press conferences (e.g., Conrad and Lamla 2010; Berger
et al. 2011a, b; Hussain 2011). However, there is no consensus from the results, which
necessitates further investigation (e.g., Ehrmman and Fratzscher 2007; Hayo and Neu-
ekirch 2011a, b). Furthermore, the existing findings on effective channels of communica-
tion reported mixed results. For example, Reeves and Swicki (2007) report that the Bank
of England’s (BOE) speeches have less effect relative to the bank’s minutes and inflation
reports on the UK financial markets whereas Hayo et al. (2010) find that speeches of the
European Central Bank’s (ECB) officials have larger effect than reports and testimonies on
the EU and Pacific markets.
Extant literature mainly focuses on developed economies and their central banks, such
as the ECB, the BOE and the Federal Reserve (the Fed). As argued by Neuekirch (2011)
and Knutter et al. (2011) central bank communication is equally fundamental for emerging
economies for the effective implementation of their monetary policy whose impact would
be felt beyond their shores. This is particularly important when their output constitutes a
significant proportion of the global output. For example, China, the subject of this paper,
is the second largest economy in terms of output after the US. Therefore, this paper fills
in this gap by investigating effectiveness of the Chinese central bank communication on

1
Formal and informal communication has been widely used in empirical and conceptual research where
formal refers to regularized and structured modes of communication while informal ones are those per-
ceived as spontaneous and nonregularized.
2
Refer to footnote 1 above.

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How effective is central bank communication in emerging… 1197

China’s money markets. Existing literature on efficient market hypothesis, such as Zeng
and McLaren (2015), suggests that Chinese markets are not only sensitive to information
but also react in response, accordingly. This is in similar fashion to established findings
in the efficiency market hypothesis. Recent evidence that supports this includes (Steeley
2004; Kadapakkam et al. 2015).
The main findings of the paper are the following. The results suggest that the Peoples
Bank of China’s (PBC) deeds tally with their words; where words indicating a change to
contractionary or otherwise is followed by the respective actions. Secondly, the PBC’s
communication is found to influence the Chinese interbank money market. Thirdly, infor-
mal communication shows a larger effect in general, but more particularly for monetary
policy stances. Lastly, communication strategies are significant in influencing the interbank
money market, but effect of diverse communication seems to exist.
The remainder of the paper is organized as follows. Section 2 provides a brief back-
ground on the evolution and structure of the PBC. Section 3 discusses methodology and
empirical strategies adopted in the paper. Section 4 discusses data and explains the con-
struction of the communication indexes. Section 5 investigates whether the PBC’s words
tally with their deeds, and if the institution is therefore credible. Section 6 presents and
discusses the estimated results. Section 7 concludes and confers policy implication.

2 Evolution of people’s bank of China and its structure

The People’s Bank of China (PBC) was established on December 1, 1948 as a product of
merging three banks; the Huabei Bank, the Beihai Bank and the Xibei Farmer Bank. In
September 1983, the State Council decided to have its function as a central bank. In the 8th
National People’s Congress, the PBC was legally confirmed the central bank status. There
are twenty departments in PBC including the monetary policy department, the financial
stability, and the international department.
One of the departments is the monetary policy department. Its main responsibilities
consist of, for example, setting intermediate targets of monetary policy and coordinating
efforts to achieve targets, proposing options of monetary policy instruments and organiz-
ing implementations, formulating of interest rate policy and administrative rules for RMB
and foreign currencies as well as RMB exchange rate policy, etc. PBC’s monetary policies
objectives and main goals are generally in line with major central banks around the world.
Precisely, it aims to achieve a stable price level, full employment, economic growth and
sustainable international accounts.
The monetary policy committee (MPC) of the PBC is not only saddled with the respon-
sibility of formulating and implementing the Chinese monetary policy, but also is respon-
sible for the monetary policy communication. The sixteen-member committee holds a
quarterly meeting; however, the policy decision is not changed regularly. Formal3 commu-
nications of the PBC are mainly the quarterly minutes of the committee’s meeting, quar-
terly monetary policy reports, financial stability reports and annual reports. Informal com-
munications of the PBC are testimonies that summarize economic stances of the previous
quarter and signals key changes in the next quarter, conferences, interviews and speeches
that are mostly given by the governor. An important difference between the formal and

3
This is based on the definition in footnote 1.

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1198 S. Su et al.

informal communications is the fact that the former is less frequent but more structured
while the latter is more frequent, less or no structure and, therefore, flexible. The different
nature of these communication channels and their related effect are of interest to the litera-
ture, which is the main object of the ‘how-to-communicate’ question. Although the defini-
tion and grouping of central bank communications into formal and informal is standardised
in the literature for comparison purposes, it is worth noting that this can vary across central
banks’ environment.
In addition to formulating and implementing monetary policy, the PBC also serves other
functions of central banking that include issuing of the country’s currency, the Renminbi
(RMB) and administering its circulation, managing of, preventing and mitigating systemic
financial risks.

3 The empirical methodology

In line with the relevant papers in central bank communications (e.g., Hayo et al. 2012;
Ehrmann and Fratzscher 2013) and given its ability to accommodate volatilities, issues of
heteroskedasticity, excess kurtosis and skewness, generalized autoregressive conditional
heteroskedasticity (GARCH) type models are adopted for our analysis. This is mainly
because, firstly, the GARCH models would capture skewness and kurtosis of series, and
secondly, they are easily employed. Specifically, the paper follows Ehrmann and Fratzscher
(2007), Hayo et al. (2012) and Buchel (2013) by using exponential generalized autoregres-
sive conditional heteroscedastic (EGARCH) models, which have the advantage of no non-
negativity constraints on the coefficients. The mean equation can be represented as:
rt = a + 𝜂rt−1 + 𝛽i Comit + 𝛾Zt + 𝜀t (1)
where i = 3, rt is the Shanghai Interbank Offer Rates (SHIBOR) rate, and ­rt−1 is its lagged
rates. Comit denotes communication indexes and Zt is the vector of control variables. The
communication indexes and its construction are explained in Sect. 4. The conditional mean
model in (1) links the SHIBOR rate to its past rates, the communication indexes and the
control variables, which include the announcement of macroeconomics news (e.g., CPI,
GPD).4 Incorporating these control variables into the model is not only the practice in the
literature, but they have also been found to be significant factors that impact on the finan-
cial markets and help in identifying true effects of the communication indexes with the
parameters of interest, 𝛽i (see for example, Ehrmann and Fratzscher 2007; Hayo et al. 2012;
Buchel 2013).
The variance of a GARCH model in Eq. (1) can be written as:
∑
𝜎t = a2 + a3 𝜀t−1 + a4 𝜎t−1 + 𝜆i Comdaysit + 𝛾ZDht (2)
i

where the variables are as defined above. The variance of an EGARCH model is given as:

⎡ � ⎤
� � � 2 � ⎢ ��𝜇t−1 �� 2⎥ �𝜇t−1 �
� � + 𝜆 � Comdaysi + 𝛾ZDh
log 𝜎t = 𝜔 + a5 log 𝜎t−1 + a6 ⎢ � − ⎥ + a7 � i t t
⎢ 𝜎2 𝜋 ⎥ 2
𝜎t−1 i
⎣ t−1 ⎦
(3)

4
The communication indexes and their constructions are explained in Sect. 4.1.

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How effective is central bank communication in emerging… 1199

Table 1  SHIBOR from overnight Series Mean SD Maximum Minimum

to 1Y
O/N 2.77 1.09 9.58 1.03
1W 3.45 1.22 9.07 1.36
2W 3.78 1.32 9.06 1.41
1M 4.23 1.34 9.70 1.74
3M 4.27 1.14 6.46 1.83
6M 4.19 1.00 5.52 1.91
9M 4.25 0.96 5.25 2.06
1Y 4.34 0.93 5.26 2.25
Communication indexes
DEO 0.12 0.39 2.50 − 1.50
WEO 0.00 0.30 2.00 − 2.00
MPI − 0.02 0.37 2.50 − 2.00

where Comdaysit denotes days of communication events and ZDhi is a vector of macroeco-
nomic variables used as controls that are explained above.

4 Data and communication indexes

4.1 Data sources and variables definitions

The focus of the paper is the interbank money market that is supposed to be directly influ-
enced by the PBC’s monetary policy communication. The PBC conducts its open market
operations in this market. SHIBOR the most liberalized and important money market rates
since 2006, are used as proxies for money market performances. The aim is to see whether
the PBC’s communication has a significant effect on the market. The daily data and central
bank communication indexes cover an eight-year period, from 2010:01 to 2017:12. The
inter-bank rates are sourced from the Shanghai Stock Exchange (SSE) and SSE database
while the macroeconomic announcements and communications are gleaned from the PBC.
The summary statistics of the SHIBOR rate along with the indexes are reported in
Table 1. It is apparent from the table that there is excess volatility, clustering and fat tail
distributions. The series are subjected to a battery of unit root tests that include the ADF,
the PP and the KPSS tests, to determine their level of integration. The results are reported
in Table 2, which have all agreed that the series are stationary on first difference. However,
the results of 1-week to 1-month rates suggest that the series are stationary on levels I(0),
but the remaining are non-stationary on levels, but stationary on first difference, I(1). These
have subsequently been noted and dealt with appropriately in the estimations.

4.2 The communication indexes

The PBC’s communication indexes are constructed and used in this paper; they consist
of those on domestic economic outlook, world economic outlook, and domestic mone-
tary policy inclinations. Based on the what-to-communicate question, economic outlooks
are about future macroeconomic conditions that have shown that they have effects on
financial markets in developed economies (e.g., Rosa 2011; Hayo et al. 2012). However,

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1200 S. Su et al.

Table 2  Unit root test

ADF PP KPSS
Level 1st Diff Level 1st Diff Level 1st Diff

SHIBOR from overnight to 1-year

O/N − 8.13*** − 8.44*** 0.52###
1W − 4.68*** − 7.33*** 0.84 0.02###
2W − 4.73*** − 5.71*** 0.56###
1M − 5.24*** − 4.85*** 0.55###
3M − 2.33 − 13.25*** − 2.34 − 21.13*** 0.52###
6M − 2.09 − 11.03*** − 2.08 − 22.98*** 0.58###
9M − 2.11 − 8.98*** − 2.08 − 19.20*** 0.64###
1Y − 2.04 − 10.27*** − 2.01 − 18.77*** 0.68###
The overall communication indexes
DEO − 44.93*** − 45.16*** 1.43 0.04###
WEO − 42.76*** − 43.14*** 0.50###
MPI − 19.04*** − 44.28*** 0.23###

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively; the ###, ## and # indi-
cate insignificance at the 1%, 5% and 10% levels, respectively

economic outlook in the literature normally focuses on domestic economy as well as the
central banks’ views conveyed about the world economy. Therefore, communication index
on world economic outlook is necessary. As discussed above, central bank communica-
tion is conventionally divided into formal and informal. Using the criteria in the literature
explained, the formal communications are summarized minutes of meetings, monetary pol-
icy reports, international financial market reports and financial stability reports. Informal
communications, on the other hand, are interviews, testimonies, conferences and speeches
of central bankers.
Before carrying out the analysis, qualitative communication data are transformed into
quantitative ones. The widely-used approach to quantify central bank communication is
through coding. This is done by analysing aspects of communication such as future mon-
etary policy inclination (tightening or easing), the positive or negative views about eco-
nomic outlook, hawkish or dovish words, informative and uninformative, and the media’s
favourableness, etc. These are generally coded from + 1 to − 1 or + 3 to − 3, respectively.
Then, these coded communication data are transformed into communication indicator, an
index (e.g., Berger et al. 2011a, b). The Swiss Economic Institute has developed mone-
tary policy communication indicator, which has been used by some researchers including
Neuenkirch (2013). However, the indicator is restrictive in terms of coverage. Hence, the
most widely used technique is the coding system. This approach may have some draw-
backs because of non-exclusion of subjectivity. One way of dealing with this as done by
some researchers is by coding the communication data based on the media reports. A sec-
ond approach is to measure communication by focusing on communication events them-
selves, for example, the frequency of communication per topic in central bank communica-
tion (e.g., Siklos and Bohl 2007), clarity and consistency of communication (e.g., Jansen
and De Haan 2006; Jansen 2011). A third approach is through impact of communication
reflected in asset prices. The usual way is to analyse this is to use dummy variables to
account for the meeting days, announcement of voting records (Chortareas and Noikokyris

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How effective is central bank communication in emerging… 1201

2014), timing of central bank communication (Ehrmann and Fratzscher 2008). These are
taken into consideration by this paper while coding to measure the communication of the
PBC. Coding also allows incorporating analysis of levels and volatility of market prices. A
narrative approach is used to code the communication based on tone intensity and previous
communications. Since the coding process is not completely objective as biases may not be
ruled out, the information is coded repeatedly and independently to deal with the problem
as in Fratzscher (2008). Following the procedure, the communication is analysed repeat-
edly and independently up to three times. Examples are provided as follows:

Example 1 During the third Sino-French financial forum, the governor of the PBC, Mr
Zhou Xiaochuan, delivered a speech in which he stated that “although the economic
growth has slowed down, we will still maintain the expansionary fiscal policy and prudent
monetary policy. Excessive looseness of monetary policy will not be adopted to maintain
the development and employment.” This is about the economic growth and the monetary
policy inclination, because no evident information implies changes of monetary policy
in the near future. Therefore, the domestic economic outlook (DEC) would be 0 in this
case as it indicates that the governor perceived the economy is stable and monetary policy
would not change.

Example 2 In the third monetary policy report of 5th November 2013, it was emphasised
that “in the near future, the economy would record growth while maintaining stability, but
it still faces a lot of risks and challenges. The underlying foundation of the price level is
unstable because of relative sensitivity of demand sides but we should continue to guide
and to manage the inflation expectation”. The information mainly focuses on inflation,
therefore monetary policy inclination (MPI) index is coded as + 1 indicating that PBC
would place emphasis on potentially rising inflation to change the situation from the cur-
rent ‘unstable’ to a stable one.

Overall, there are 217 overall domestic economic outlook episodes where the central
bank either predicts positive or negative domestic economic trend and 144 overall world
economic episodes where the central bank predicts world positive or negative global eco-
nomic outlook trend. There are 207 overall monetary policy inclination indicators. That is
where the bank signals monetary policy changing, either dovish or hawkish attitudes.

4.2.1 Communication on domestic economic outlook (DEO)

The domestic economic outlook, DEO is coded from − 2 to + 2 according to whether the
communication suggests negative or positive outlooks, respectively. For example, if the
central bank predicts that the domestic economic is very likely to be positive, then it is
coded as + 2 and vice versa. However, in this case, most indexes are in the interval from
− 1 to + 1. These can be represented as the following.
{
> 0 positive domestic economic outlook
DEO =
< 0 negative domestic economic outlook (4)

where positive domestic outlook refers to the PBC’s prediction that domestic economic
trend would rise whereas negative index means that the bank predicts a fall in the trend.
Figure 1 reports the DEO where it illustrates that the DEO slowly decreases, which
is represented by the dashed line. This is consistent with changes in China’s economic

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1202 S. Su et al.

-1

-2

-3
Overall DEO Trend of Overall DEO
-4

Fig. 1  DEO communication index

80% 76%

70%
60%
50%
40%
30%
20% 13%
10%
10%
1%
0%
<-1 <0(including -1) >0(including 1) >1

<-1 <0(including -1) >0(including 1) >1

Fig. 2  Distribution of overall DEO communication indexes

conditions in recent years, mainly because of transformation of domestic economic

structures, looming real estate market bubbles and the worldwide financial crisis and its
aftermath.
Figure 2 summarises the episodes into negative, positive and neutral outlooks. The
figure shows dominance of positive outlook communications for the period covered,
2010–2017. It accounts for 76% while negative outlook communications were 14% and
neutral consists of 10% of the total communications.

4.2.2 World economic outlook (WEO) Index

The PBC also communicates its views about world economic outlook in a similar fashion
with other central banks. The index is constructed to see if the bank’s communications on
foreign economic outlooks have an impact on the Chinese money market. The world eco-
nomic outlook index, WEO is given as follows:
{
> 0 positive world economic outlook
WEO =
< 0 negative world economic outlook (5)

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How effective is central bank communication in emerging… 1203

Fig. 3  WEO communication 2.5

indexes 2
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Overall WEO Trend of overall WEO

50% 45%
45%
40% 35%
35%
30%
25%
20%
15%
10%
5% 3% 3%
0%
<-1 <0(including -1) >0(including 1) >1

<-1 <0(including -1) >0(including 1) >1

Fig. 4  Distribution of WEO communication indexes

where positive index refers to the view that world economic trend would rise while nega-
tive one, on the other hand, means that the PBC’s perceives that the global outlook would
trend will fall. Figure 3 displays this index, which indicates that there is a gradual but
slowly increasing tendency of the world economic outlook, which corresponds with real
world economic performances reported. The worldwide sub-prime crisis receded around
2012 and this is reflected in the index where the trend starts to become positive, although
not substantially. However, the positive values (e.g., after 2014) are more apparent than the
previous years.
Compared with percentages of domestic economic outlook indexes in Figs. 3, 4 shows
that the Chinese central bank communications on world economic outlook are more con-
servative. Negative and positive global economic outlooks represent almost same propor-
tions, 45% and 48%, respectively.

4.2.3 Communication on monetary policy inclination (MPI)

This index represents the PBC’s monetary policy inclination: tightening or easing signs.
For example, if the governor communicates that a high inflation rate needs to be tackled
with immediate effect, the communication was coded as + 2. The monetary policy inclina-
tion is coded in a similar fashion to those of DEO and WEO indexes.
{
> 0 tightening monetary policy inclination
MPI =
< 0 easing monetary policy inclination (6)

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1204 S. Su et al.

Fig. 5  MPI communication 3

indexes
2

-1

-2

-3 Overall MPI Trend of overall MPI

60%
52%
50%

40% 36%

30%

20%

10% 7% 5%

0%
<-1 <0(including -1) >0(including 1) >1

<-1 <0(including -1) >0(including 1) >1

Fig. 6  Distribution of overall MPI communication indexes

where positive indicates tightening and negative refers to easing monetary policy, respec-
tively. Since January 2011, the PBC has moved from slightly ease monetary policy stance
to a more prudent monetary one. There are more tightening inclinations in 2011 than in
2010 and the trend continues with an effort to deal with rising inflation, which is shown
in Fig. 5. However, direction started to change as, for example, monetary policy easing
was adopted since 2012. This is mainly because of the concerns about economic down-
ward pressure. This led to the shift from the prudent monetary policy towards a slightly
monetary policy easing stance. This is also captured in Fig. 6 where the monetary policy
easing inclination contributes to more than half of the total communications on monetary
policy index (55%). The three constructed indexes along with the SHIBOR were displayed
in Fig. 7. The figure shows that, to some extent, the three communication indexes move
together with the SHIBOR (Figs. 8, 9).

4.3 Central bank credibility: words versus deeds

One of the essences of central bank communication is to help monetary authorities to

acquire and maintain credibility. One way of investigating this is by relating the words of a
central bank with its deeds. If it is found that the words match the deeds, the literature con-
cludes that the bank is credible (see for example, Berger et al. 2011a, b). This is because if
a central bank does not do what it has conveyed to the economic agents, this would under-
mine its credibility and market confidence. In contrast, high central bank credibility could
command the market confidence and, therefore, allows the bank to be in a better position

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How effective is central bank communication in emerging… 1205

0
07-01-2010 22-05-2011 03-10-2012 15-02-2014 30-06-2015
-1

-2 changes of benchmark lending rate based on 0 (2010/1/7)

-3 communicaon index trend

Fig. 7  Trend comparison of interest rates and MPI index

Fig. 8  Trend comparison of RRR 8

and MPI index
6

0
06-07-2009 18-11-2010 01-04-2012 14-08-2013 27-12-2014 10-05-2016
-2
trend of changes of reserve requirement rao
-4 communicaon index trend

Fig. 9  Trend comparison of open market operations and MPI index

to manage market expectations. It is along this line that this paper tries to match the PBC’s
deeds with its words. It is difficult to match the central banks’ words match deeds exactly.
However, as argued by Berger et al. (2011a, b) central bank communications on changes
in monetary policy (moving either from contractionary to expansionary and vice versa)

13
1206 S. Su et al.

Fig. 10  Trend comparison of 5

policy rate changes (benchmark 4
rates plus RRR) and MPI index
3

0
06-07-2009 18-11-2010 01-04-2012 14-08-2013 27-12-2014 10-05-2016
-1

-2 changes of benchamark rates and RRR(assume 0.25 changes)

-3 communicaon index trend

7
6
5
4
3
2
1
0
14-10-2009
-1 22-01-2010 02-05-2010 10-08-2010 18-11-2010 26-02-2011 06-06-2011 14-09-2011 23-12-2011 01-04-2012 10-07-2012

-2
trend of changes of reserve requirement ratio
-3
Trend of MPI Index

Fig. 11  Trend comparison of RRR and MPI index

should correlate with the banks’ actions. That is the sign of the correlation between com-
munications and actions in this regard should be positive (Berger et al. 2011a, b).5
The PBC relies on the benchmark interest rates, reserve requirement ratio (RRR), and
open market operation as its main monetary policy tools, although it does not regularly
change either its benchmark interest rates or reserve requirement ratios (23 irregular
changes for the period covered). Accordingly, the monetary policy inclination communica-
tion index and the PBC’s monetary policy actions are compared. The comparison is con-
ducted in each of the policy changing intervals to look at the correlation between their
words and deeds.
The first one is trend comparison between benchmark interest rates (average of bench-
mark interest deposit and lending rates) and monetary policy inclination communication
index. The analysis is carried out for the whole sample period, which is reported in Fig. 10.
The figure indicates that in the last period (07/06/2012 to the end of the sample), it is not
clear that communication positively correlates with the policy actions. One of the reasons
might be due to no benchmark changes from the period. However, computing the trend
after January 2014, a similar direction between words and deeds of the PBC is apparent.
This might signal that communication is provided in order to manage economic agents’
expectations for advance policy changes.

5
Correlation here should not be thought as causation. The aim here is not to investigate any causal rela-
tionship between the two, but to find out if the bank does what it says it will do in terms of monetary policy
changes.

13
How effective is central bank communication in emerging… 1207

30

20

10

0
02-01-2010 21-07-2010 06-02-2011 25-08-2011 12-03-2012 28-09-2012 16-04-2013 02-11-2013 21-05-2014 07-12-2014
-10

-20
communication index trend
open market operation trend
-30

Fig. 12  Trend comparison of open market operations and MPI index

0
14-10-2009 02-05-2010 18-11-2010 06-06-2011 23-12-2011 10-07-2012 26-01-2013 14-08-2013 02-03-2014 18-09-2014 06-04-2015
-1

-2
changes of policy rates
-3 communication index trend

Fig. 13  Trend comparison of policy rates (repo rates plus RRR) and MPI index

Figure 11 relates the RRR and the MPI index. This is by running a correlation between
the changes in RRR and MPI index. The results show that, in general, the communication
index trend and changes of RRR tend to move together. These are open market operations
that focuses on the total amount of repurchase and reverse repurchase together every half
year.
Figure 12 reports the relationship between interest rates and the MPI, which illustrates
that, in most of the period, the two trends move in the same direction, however they diverge
during the last two years of the period covered. Finally, trends of MPI and changes of the
policy rates along with the RRR were compared, which are depicted in Fig. 13 displaying
that, in general, communication indexes move with policy rates.
As there are four apparent intervals (i.e. two increasing and two decreasing trends) in
Fig. 13, they are used to examine whether the adaptive communication changes are sig-
nificantly and positively related to the following changes of policy rate. Therefore, the
independent variable is the accumulative changes of average benchmark interests and
reserve requirement ratios based on the changed order along the timeline. The explan-
atory variables are the accumulative changes of communication index in each policy
changing interval, and three dummy variables (i.e. Di where i = 1 − 3) as proxies for the
intervals. Since the policy rates changed irregularly, the time-adjusted data have been
used to deal with this. Trend comparison shows that most of the trends of communica-
tion index and the trends of policy rates seem to move together. However, the last pol-
icy interval is almost half of the total five-year time interval. Therefore, the changes of

13
1208 S. Su et al.

Table 3  Expected signs of the Mean Volatility

coefficients on SHIBOR
DEO + −
WEO + −
MPI + −

communication index are likely to be not clear, and the time-adjusted policy rate is also
much larger than the previous data. Due to this special case of the long interval without
policy rate changes, the analysis concentrates on the first three intervals are focused.
The estimated model is given as:
Δrt = 𝛼 + 𝜂rt−1 𝛽ΔCIt + Di + 𝜀t (7)
where rt is time adjusted policy rates, CIt is the communication index and Di represents the
interval dummies explained above. The estimated results are reported in Table 2, which
show that the relationship between policy changes in policies and communication is posi-
tive in each time interval. Furthermore, the values are decreasing. Reasons for this could
be that the open market operations have the power in the ‘words and deeds’ analysis, and it
also might be that the central bank credibility has changed, or the communication index is
not complete enough to capture the entire relationship. In general, based on these analyses
above, it shows that the words of the PBC, at least, partly match their deeds.

5 The estimations and the discussions of the results

5.1 The PBC’s communication on the interbank money market

As discussed above, EGARCH and GARCH models are estimated. GARCH (1,1) was used
because it handles skewness and kurtosis better and produces slightly better significant
results and smaller numbers of information criteria (i.e., SIC and AIC) in this case. Table 3
summarises the expected signs of the coefficients on the SHIBOR rates. The coefficients on
the mean of all the indexes are expected to be positive while those on the volatility to be
negative. The results containing at least one significant coefficient in either mean or vari-
ance equation are reported in this paper. In addition, some periods of one-year SHIBOR
are with no changes at all, overnight SHIBOR (O/N) to nine-month SHIBOR (△9 M) are
mainly estimated, which are shown in Table 4 with figures that sums the SHIBOR perfor-
mance of each maturity for better comparison.
The first half of Table 4 shows that communication indexes have positive effects on most
of SHIBOR series. Variance of communication on domestic economic outlook increases
whereas all variance of the world economic outlook index shows a decrease. The variance
of the overall communication on monetary policy inclination increases up to three-month
SHIBOR where it starts to decline. For the absolute effects, both mean and variance show
an increasing marginal trend. The communication on monetary policy inclination has
larger effects than the other two as demonstrated by the sizes of the coefficients. Com-
munication on world economic outlook has significant effects although smaller than those
of domestic economic outlook. Also, communication on world economic outlook reduces
market volatility.

13
 Table 4  Effects of the communication indexes on SHIBOR
O/N 1W 2W 1M ∆3M ∆6M ∆9M

Domestic Economic Outlook 0.0134*** 0.0010 − 0.0037*** 0.0002* 0.0001** − 0.0001***

(− 0.2729**) (0.2069***) (0.3584***) (0.1913***) (− 0.2239***) (0.4033***)
World Economic Outlook 0.0350*** 0.0045*** 0.0012 0.0012 − 0.0006** − 0.0004*** − 0.0001
How effective is central bank communication in emerging…

(− 0.0981***) (− 0.1149 ***) (− 0.1832***) (− 0.3295***) (− 0.6859***) (− 0.4618***) (− 0.2051***)

Monetary Policy Inclination 0.0593*** 0.0024* 0.0030* 0.0065*** 0.0005*** 0.0001*** 0.0001*
(0.8366***) (− 0.0166) (0.0041) (0.1239***) (0.9516***) (− 0.0631**) (− 0.1171***)

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively. The first line of each group of outputs is the mean level while the second line in brackets
show the change of volatility estimated by the EGARCH
1209

13
1210 S. Su et al.

5.2 Formal versus informal communication

Since above findings suggest that the PBC’s communication has effects on the country’s
money markets, it would be meaningful to examine the PBC’s communication in more
detail. One of the important points suggested by the literature is the communication chan-
nel. For example, it is worthwhile to assess effects of formal and informal communication,
addressing the ‘how-to-communicate’ question. According to the communication data (i.e.,
formal or informal), the three overall communication indexes are transformed and extended
to six communication indexes (e.g., formal monetary policy communication index and
informal monetary policy inclinations).6 It is noticed that the PBC does make efforts on
anti-corruption communication (69 communication events) to accompany the anti-corrup-
tion waves in the country. It would be interesting to see the effects of this emphasis. Very
little research analyses this announcement effect; however, Chinese government and the
central bank clearly convey their increasing tendency to deal with corruption. We focus
on the interbank money market where the PBC has a direct influence. China has a rather
urgent problem of corruption, it is believed nationally that communication attributes to
domestic economic outlook, because more anti-corruption waves are likely to be advanta-
geous to a brighter economy.
The results on the channels of communications are contained in Table 5, which are con-
sistent with those reported in Table 3 and show some improvement in the marginal effects.
The results show that informal monetary policy has the biggest effects (0.5) on the over-
night rates but decline to 0.3 on the 9-month rates. Furthermore, compared with formal
communication, informal communication (e.g. speeches) performs better in this market.
In terms of volatility, the informal communication reduces volatility while formal com-
munication demonstrates a different effect. This could lead to some policy implications.
For unique emphasis on anti-corruption communication, it significantly decreases the vari-
ance and shows an increase in the mean value. It is argued that the anti-corruption com-
munication is beneficial to the anti-corruption campaigns which is believed to lead to a
better economic performance. From this perspective and this unique feature of China, anti-
corruption communication could belong to the domestic economic outlook. In this way, the
indexes of the domestic economic outlook have larger effects than the indexes of the world
economic outlook.

5.3 Communication strategies of the PBC

The above analysis shows that communication of the PBC has significant effects on the
interbank money market. Furthermore, comparison between communication channels sug-
gests that communication strategies matter for performance of communication. Therefore,

6
It can be argued that distinction between the formal and informal communication, particularly in the Chi-
nese context may seem to be artificial as clear distinction between the two may be blurred. This is a plau-
sible argument. However, what the paper did here is to use the criteria in the literature to group the com-
munications into the two groups and to see if ad hoc statements and clarifications provided by the Bank’s
officials have any effect or not. Therefore, the PBC’s formal communication regarded are the monetary
policy reports while informal communication are those statements made by mostly the governor and the
MPC’s members in occasions such as conferences, dinners with the private and public sectors, etc. How-
ever, further investigations on whether distinction of communications into formal and informal communica-
tions matters for some countries such as China is either relevant or not, which is beyond the scope of this
paper.

13
 Table 5  Effects of communication channels on SHIBOR
O/N 1W 2W 1M ∆3M ∆6M ∆9M

Formal domestic − 0.0143*** − 0.0013 − 0.0036* − 0.0033** − 0.0001*** − 0.0001***

(0.3956***) (− 0.1400***) (− 0.0576) (− 0.1584***) (− 0.0943) (0.4644***)
Informal domestic 0.0126 *** 0.0021 0.0089*** − 0.0008*** (0.6431***) (− 0.1862***)
(− 0.2267***) (0.2378***) (0.5388***) (0.2396***)
Formal world − 0.0263*** − 0.0034* 0.0013 − 0.0001 0.0001*** 0.0001**
(0.4048***) (0.3041***) (0.1996***) (0.2914**) (1.3282***) (0.2386**)
How effective is central bank communication in emerging…

Informal world 0.0413*** 0.0019 − 0.039 − 0.0110*** 0.0002 (− 0.8101***) (− 1.1808***)

(− 0.7763***) (− 0.2381***) (− 0.2008***) (− 0.4067***) (− 1.0562***)
Formal monetary − 0.0126* − 0.0010 0.0034 0.0006* (− 1.4076***) − 0.0001**
(− 0.3890***) (− 0.3795***) (− 0.0780) (− 0.4319***) (0.0882)
Informal monetary 0.0491*** 0.0034** 0.0043** 0.0138*** 0.0011*** (0.2209***) (0.2508***)
(0.6933***) (0.1364***) (− 0.0379*) (0.0761***) (1.3112***)

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively. The first line of each group of outputs is the mean level while the second line in brackets
show the change of volatility estimated by the EGARCH
1211

13
1212 S. Su et al.

the following section has a further look at communication strategies of the PBC, particu-
larly the governor’s communication channels and strategies.

5.3.1 The governor’s communication

The PBC’s communication data reveal that the governor’s communication accounted for a
large amount of the total communication events (28%), which is similar for most of central
banks. Based on this, the governor’s communication is likely to be important. The gover-
nor’s communications can be categorized into two groups: speeches (43 events) and gen-
eral communication. Researchers (e.g., Siklos and Bohl 2007; Hayo and Neuenkirch 2013;
Ji and Zhou 2011) place emphasis on the overall governor’s speeches, however, it would be
possible to extend the depth of this analysis. The anti-corruption communication is related
by the governor, then this information is added into control variables for a ‘purer’ effect of
governor’s communication.
The governor’s communication was analysed to check whether it has significant effects
on the money market. GARCH (1,1) model performs better than the GARCH (1,1) in this
case and the modified model used takes the following form:
rt = a0 + a1 rt−1 + 𝛽1 Overallcomt + 𝛽2 Governor� sC + 𝛾Zt + ∈t (8)

⎡ � ⎤
� � � 2 � ⎢ ��𝜇t−1 �� 2⎥ �𝜇t−1 �
� � + 𝜆 OCD + 𝜆 GCD + 𝛾ZDh
log 𝜎t = 𝜔 + a5 log 𝜎t−1 + a6 ⎢ � − ⎥ + a7 � 1 2 t
⎢ 𝜎2 𝜋⎥ 2
𝜎
⎣ t−1 ⎦ t−1
(9)
where the OCD in Eq. (9) is the days of communications and GCD refers to the days of
governor’s communication. The estimated results are reported in Table 6. It can be seen
from the table that the governor’s overall communication has significant effects on the
SHIBOR. The results of the governor’s communications increase the mean and decrease
its volatility significantly. Dummy variables were constructed and used to check whether
the governor’s general information and speeches have different effects. The lower part of
Table 6 reports that all the mean coefficients respond positively to the governor’s speech
that also shows more ability to reduce market volatility. This may indicate that speeches by
the governor have significant impact on the Chinese money markets.

5.3.2 PBC’s communication strategies

Three specific communication strategies of the PBC are analysed, which are fixed testi-
mony, high-frequency senior officials’ communication, and same-day communication.
During the data collection, some apparent communication strategies were noticed, and it
would be interesting to see whether they are generally effective.

(i) Fixed Testimony Strategy

  The PBC has put increasing efforts on its communication in recent years. It mostly
communicates irregularly, however, this unique strategy with four-fixed press confer-
ences each year was introduced from January 2013. The fixed date of communication
could attract more attention, because the public is likely to anticipate and prepare
for this communication. The press conference of the European Central Bank is an
exact example. The announcement effects of this strategy are analysed with the help

13
 Table 6  Effects of the governor’s communications
O/N 1W 2W 1M ∆3M ∆6M ∆9M ∆1Y

Governor’s Other C − 0.0601*** 0.0385 − 0.0070 0.0403*** − 0.0012*** − 0.00001***

(0.9731) (0.2666) (0.146) (0.2712) (− 0.0853) (− 1.148)
How effective is central bank communication in emerging…

Governor’s Speeches 0.0206*** 0.0286** 0.010*** 0.0259*** 0.0030*** 0.0009*** 0.00001*** 0.0012***
(− 0.7196) (− 0.1614) (− 0.281) (0.0942) (0.9128) (− 1.161***) (− 1.545) (− 0.5699)

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively. The first line of each group of outputs is the mean level while the second line in brackets
show the change of volatility estimated by the EGARCH
1213

13
1214 S. Su et al.

Table 7  Estimation for high-frequency senior officials’ communication

O/N 1W 2W 1M

High-frequency strategy
0.2433 0.1473***
(0.4075) (− 0.0431)
∆3M ∆6M ∆9M ∆1Y

− 0.0157*** 0.0044*** 0.0052*** 0.0022***

(− 0.6819) (− 0.1216) (− 0.5177) (0.3720)

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively. The first line of each
group of outputs is the mean level while the second line in brackets show the change of volatility estimated
by the EGARCH

of dummy variables based on the EGARCH (1,1) model presented in Eq. (8). The
evidence in Table 7 shows that most of the mean and volatility are positive and nega-
tive, respectively, which are consistent with the conjecture is that communication
indexes or announcement effects should positively influence the levels of SHIBOR
and negatively impacts the volatility. The fixed testimony strategy started in January
2013 when the PBC has already moved towards a monetary policy easing inclina-
tion. The monetary policy easing inclination seems to have been well understood as
well as assimilated these signals correctly. Therefore, this newly introduced fixed
testimony strategy has some effective ability to influence the Chinese money market
in a desired direction.
(ii) Strategy of High-Frequency Senior Officials’ Communication
  In the first five months of 2011, information about previous macroeconomic per-
formance was frequently communicated, especially the path and the future policy
direction emphasised. Each communication by senior officials provided rather com-
prehensive information. The effect of this communication strategy, or these unique
communication events, is of interest. Therefore, information contained is different
from economic outlook or monetary policy inclination and needed to be examined
separately. The conjecture here is that this information could affect volatility due to
the relatively extensive information contained which is similar to the one analysed
by Reeves and Sawicki (2007) on the UK.
  The first half of Table 7 reports the estimated results which show that in the short
run, the high-frequency communication strategy reduces both the mean and volatil-
ity, however, it seems to show increasing effects on volatility in the 3-month to a
year’s rates. This information mainly contains the path and focus of future monetary
policy inclinations, which is unique to other communications, the hypothesis is sup-
ported by the findings that it creates news and volatility in the market. The results
reported here are consistent with those in the extant literature.
(iii) Same-Day Communication Strategy (Consistency or Dispersion)
  Central bank communication sometimes hits markets on the same day whether
on purpose or not. Therefore, what would be the effects of this same-day commu-
nication? Would it have a strengthening effect on the market or otherwise. Based
on these ideas, three overall communications and the communications that hit the
market on the same day are of primary interests. To conduct this analysis, 48 days
with same-day communication were further categorized into two variables, the

13
How effective is central bank communication in emerging… 1215

Table 8  Estimation for same-day communication

O/N 1W 2W 1M

Double effect −0.0385*** − 0.0131** 0.0083**

DEO 0.0077 0.0042 − 0.0148*** 0.0021***
(0.2778***) (0.4421) (1.1332***)
WEO 0.0605
(0.8534***)
MPI − 0.0045* 0.0436 0.0076*** 0.0052*
(− 1.1252***) (− 0.7910***) (− 0.1572***) (− 0.3613***)
∆3M ∆6M ∆9M ∆1Y

Double Effect 0.0018*** 0.0001***

DEO − 0.0040*** (0.9016***) (− 0.4294***) (− 1.5964***)
(0.1754)
WEO 0.0050** − 0.0014** 0.0003*** (− 1.1029***)
(− 1.3005***) (− 0.4947***) (− 0.8690***)
MPI 0.0042** − 0.0001*** − 0.0002*** 0.0013**
(1.3171***) (0.0990) (1.6722***) (3.3643***)

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively. The first line of each
group of outputs is the mean level while the second line in brackets show the change of volatility estimated
by the EGARCH

same-day communication on domestic and world economic outlook together (EC),

and the same-day communication on monetary policy inclination (MP). Then, the
days (5 days) that contain both economic outlook and monetary policy inclination
were considered. An interaction slope dummy variable was used when both same-
day communication together hit the market. For example, say the double same-day
effects. Other two dummy variables were proxies for effects of each type of same-day
communication. The mean equation of the EGARCH (1,1) model for analysis takes
the following form:
 
rt = a0 + a1 rt−1 + 𝛽1 Comt ∗ SDD + 𝛽2 SDEC + 𝛽3 SDMP + 𝛾Zt + ∈t (10)
where SDD. is the double effect dummy, SDEC . is the same-day communications
on economic outlooks, and SDMP is the same-day communications on monetary
policy inclination. Table 8 shows that double-effect variable is negative. Same-day
communication about overall economic outlook and monetary policy inclination
are found with more negative values. However, the two variables in the variance
equation significantly reduce market volatility particularly in the long run. There-
fore, strengthening eects have not been found. This leads to some more thoughts.
A closer look at the data shows dispersed communications on the same day, which
brings a question: are the communications prevented inhibited the supposedly
strengthening effects? This is generally consistent with literature (e.g., Berger et al.
2011a, b; Erhmann and Fratzshcer 2013). Emphasis is placed on the mean value of
coefficients and the results about volatility is not clear.

Table 9 reports the coefficients with at least one significant value. The same-day effects
without dispersion results are shown to be mostly positive. From the line of ‘dispersion
effect’, the evidence suggests that dispersion communication indeed has negative effects on

13
 1216

13
Table 9  Effects of same-day communication with and without dispersion (Change of Volatility)
O/N 1W 2W 1M ∆3M ∆6M ∆9M ∆1Y

DEO with dispersion 0.281*** 0.442** 0.792*** 0.902*** − 0.429*** − 0.904***

DEO without dispersion 0.067* 0.698*** 1.159*** − 0.396*** − 0.352*** − 1.158***
Dispersion effects 0.214 − 0.256 − 0.368 1.297 − 0.078 0.253
DEO with dispersion 0.883*** − 1.301*** − 0.495*** − 0.869*** − 1.596***
DEO without dispersion − 0.295*** − 0.694*** − 0.742** − 0.317 − 1.155*** 0.053
Dispersion effects 1.178 0.694 − 0.559 − 0.178 0.286 − 1.649
DEO with dispersion − 1.159*** − 0.158*** − 0.361*** 1.317*** 1.672*** − 1.103***
DEO without dispersion − 0.332*** − 0.129** − 0.545*** − 0.839*** 0.332** 2.228***
Dispersion effects − 0.827 − 0.029 0.184 2.157 1.34 − 3.330

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively. The marked numbers show that the dispersed communication increases volatility of SHI-
BOR
S. Su et al.
How effective is central bank communication in emerging… 1217

Table 10  Estimation for ‘foreign exchange’ talks

US Dollar British Pound Euro Hongkong Dollar Japanese Yen

FX talks 0.0168*** − 0.0105*** − 0.0611*** − 0.0491*** − 0.0004***

(− 3.8680) (− 1.6835) (− 3.0267) (− 2.3795) (− 1.9141)

The ***, ** and *indicate significance at the 1%, 5% and 10% levels, respectively. The first line of each
group of outputs is the mean level while the second line in brackets show the change of volatility estimated
by the EGARCH

the means of the market price. The model was then estimated again without dispersion and
was compared with the one with dispersion. It is found that four of five double same-day
communications were dispersed.
Table 10 reports estimations on communications regarding the foreign exchange mar-
kets. This covers the US dollar, British Pound, the Euro, the Hong Kong dollar and Japa-
nese Yen. The results indicate that the communication has negative moderating effects on
all the currencies’ volatility. However, the results on the coefficients on the mean are all
negative, except that of the US dollar. This might be due to the dominance of the US dollar
in the global foreign exchange markets.7

6 Conclusion, policy implication and possible extensions

The increasing importance of central bank communication makes it a worthwhile research

interest. The main role of central bank communication is to move the markets in order to:
(i) improve market efficiency and (ii) decrease market volatility (Blinder et al., 2008). This
topic has attracted considerable attention, but mostly on developed economies. Although
emerging and developing economies have become important in the global output, effec-
tiveness of central bank communications in these economies has been largely overlooked.
This paper attempts to fill the gap by looking at the effects of the PBC’s communications
on Chinese interbank money market.
The empirical results show that the PBC’s words match its deeds. In addition, its com-
munications have some significant effects on the money market. With respect to the what-
to communication question, the supposedly responsive interbank money market indeed
shows a large response, particularly to communication about monetary policy inclination.
A similar finding is the effect of informal communication, which suggests policymakers
and market observers watching more informal communication such as speeches of the cen-
tral bank governor and its officials. The governor’s speeches are found to be influential on
the money market. Furthermore, emphasis on anti-corruption communication has effects in
reducing market volatility. The three communication strategies of the PBC have significant
effect on the money market. Finally, dispersed communications, in particular those that

7
This paper sets to investigate effects of PBC’s communication on the Chinese money market. It could be
argued that looking at the effects on the entire economy will be a good thing. This is particularly relevant
in the light of recent findings by Lai and Goh (2019) that recent changes in Chinese exchange rate policies
not only precipitated response from the entire economy, but also in other economies. The argument is very
plausible, however, it is beyond the scope of this paper.

13
1218 S. Su et al.

affect the market on the same day, should be treated with care when communicating to the
public and the markets as they tend to increase market volatility.
Some of the policy implications of the findings include the following: (i) the PBC’s
can use communication as an effective policy in the interbank money market in China. (ii)
Global economic outlook communication needed to be carried out with a caution. (iii) The
three communication strategies adopted by the bank were able to reduce market volatility
and the bank, should, therefore, strengthen them for greater benefits. The foreign exchange
communication is particularly significant and therefore can be used as required to calm
down the markets, particularly the one between RMB and the US dollar, which is more
central to Chines investors. (iv) Consistency in communication is beneficial.
A potential extension of the work is to investigate the effect of central bank communi-
cation on other Chinese financial markets such as foreign exchange markets. It would be
also possible to investigate communication channels with more details such as compari-
son between monetary policy reports and speeches which could shed light on what kinds
of communication channels are more appropriate for certain markets. Another important
extension is to look at the effects of central bank communication on an entire economy.

Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 Interna-
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