185 - Has the Clarity of Humphrey-Hawkins Testimonies Affected Volatility in Financial Markets?

DNB Working Papers
Date 4 November 2008

By applying readability statistics to the Humphrey-Hawkins testimonies given by the Federal Reserve Chairman, I test whether the clarity of central bank communication affects volatility in financial markets. There are three key results. First, when clarity matters, the results are unequivocal: clarity diminishes volatility. Second, clarity of communication matters mostly for volatility of medium-term interest rates. Third, the effects of clarity vary over time. Clarity mattered especially, but not exclusively during Alan Greenspan's term at the Federal Reserve. Overall, the analysis shows the importance of transparent communication on monetary policy. JEL classifications: E44, E52, E58. Keywords: central bank communication, transparency, readability, financial markets, volatility