In addition to setting interest rates, central banks also communicate with the public about economic conditions and future actions. While it has been established that communication can drive expectations, less is known about how it does so. This column attempts to shed light on this question. Applying novel measures to the content of Federal Reserve statements, it shows that forward guidance is a more important driver of market variables than disclosure of information about economic conditions.
Stephen Hansen, Michael McMahon, 03 February 2016
Alessandro Gavazza, Mattia Nardotto, Tommaso Valletti, 31 January 2016
The internet is lauded for increasing access to information, but it is unclear whether this translates into a better-informed and more engaged voting populace. This column uses UK data to determine how the internet has changed voting patterns and aggregate policy choices. Internet penetration is found to be associated with a decrease in voter turnout, mainly among the lower socioeconomic demographic. Internet diffusion is also found to reduce local government expenditure, in particular on policies targeting less-educated voters. These findings point to a trade-off between the ‘digital divide’ and the ‘political divide’.
Yana Jin, Mu Quan, Chiara Ravetti, Zhang Shiqiu, Timothy Swanson, 02 December 2015
Many cities in China have notoriously high levels of air pollution. Given its tight control over the media, the Chinese government has a high degree of control over public information about air quality. This column explores the government’s incentive to downplay the seriousness of pollution spikes. Households that rely exclusively on public media are found to engage in less self-protective behaviours. This could lead to substantial public health costs in the long run that might otherwise have been avoided.
Emilie Anér, Anna Graneli, Magnus Lodefalk, 14 October 2015
A large body of research has established a positive link between immigrants and bilateral trade. However, the temporary movement of people across borders has received less attention. This column uses Swedish data to analyse the impact of temporary cross-border movement on trade. Recently arrived migrants are found to reduce the negative impact of distance on foreign trade, by assisting firms to overcome informal and informational barriers to trade with their origin country. Facilitating movement of people across borders can be a highly useful tool for engaging in and benefitting from specialised and internationalised production networks.
Carin van der Cruijsen, David-Jan Jansen, Jakob de Haan, 23 August 2015
Central banks have typically targeted their communication at financial markets. Increasingly, however, many have started actively communicating with the general public. Using Dutch survey data, this column finds that the public’s knowledge of monetary policy objectives is far from perfect, and varies widely across respondents. Those with a greater understanding of ECB objectives tend to form more realistic inflation expectations. Central banks seeking to target the general public must take account of discrepancies in households’ knowledge of and interest in monetary policy.
Tomohiko Inui, Keiko Ito, Daisuke Miyakawa, 06 January 2015
While large Japanese firms have been present internationally for years, small firms have found it difficult to overcome the information obstacles associated with entering overseas markets. This column argues that lender banks can help as they not only provide financial support but also business consulting services using their extensive knowledge obtained through lending transactions. It shows that small and medium firms whose lender banks accumulate more overseas market information are more likely to start exporting.
Philippe Andrade, Richard Crump, Stefano Eusepi, Emanuel Moench, 23 December 2014
Expectations are critical for macroeconomics and financial markets. But the expectation-formation process is not well understood. This column discusses some empirical characteristics of forecast disagreement from professional forecasters in the US, and discusses the ‘information frictions’ that underlie the heterogeneity of expectations.
Xavier Vives, 22 December 2014
Banking has recently proven much more fragile than expected. This column argues that the Basel III regulatory response overlooks the interactions between different kinds of prudential policies, and the link between prudential policy and competition policy. Capital and liquidity requirements are partially substitutable, so an increase in one requirement should generally be accompanied by a decrease in the other. Increased competitive pressure calls for tighter solvency requirements, whereas increased disclosure requirements or the introduction of public signals may require tighter liquidity requirements.
Susan Ariel Aaronson, 14 July 2014
The internet promotes educational, technological, and scientific progress, but governments sometimes choose to control the flow of information for national security reasons, or to protect privacy or intellectual property. This column highlights the use of trade rules to regulate the flow of information, and describes how the EU, the US, and their negotiating partners have been unable to find common ground on these issues. Trade agreements have yet to set information free, and may in fact be making it less free.
Alessandro Beber, Michael W Brandt, Maurizio Luisi, 19 April 2013
Timely measurement of the state of the economy traditionally relies on low-frequency observations of a few economic aggregates referring to previous weeks, months, or even quarters. This column presents a new method of a real-time approach to timely and more accurate macroeconomic news.
Nicolas Magud, Evridiki Tsounta, 16 January 2013
The ‘neutral’ rate is the real interest that is consistent with stable inflation and narrow output gaps. This column discusses the various estimation techniques and presents estimates for a range of Latin American nations. No methodology is fully correct: central banks must still make a subjective judgement, but econometrics can significantly help to inform it.
Ana De La O, Alberto Chong, Dean Karlan, Léonard Wantchékon, 23 January 2012
For democratic theorists, the notion that greater transparency improves accountability is axiomatic: when voters find out about political corruption, they punish the offending politicians by not voting for them again. But, the authors of CEPR DP8790 argue, many voters also respond to evidence of corruption by not voting at all – indicating that more transparency might not automatically result in a healthier democratic process.
Patrick Legros, Estelle Cantillon, 18 October 2007
Mechanism design theory is a major breakthrough in the modern economic analysis of institutions and markets. It revolutionalised the way economists think about optimal institutions and regulation when governments don't “know it all.” It has had a major impact on current policy-making and will continue to do so in the future.