Can central bank communication help to stabilise inflation expectations?

Big data have become an important aspect of the analysis of the decisions of economic agents (Choi and Varian, 2012). To assess the public’s information demand to ECB communication, we use a data set on visits of the ECB’s website. The digital footprints of individuals on the ECB website allow us to track website traffic on a daily basis, and thus to measure the public’s information demand to ECB communication. Our novel dataset on search volumes of visitors was extracted with Google Analytics. The new dataset covers daily search activities by the public during 2008 and 2017 for the ECB website. Breakdowns of search activity by external users are available by sections of the ECB website, thereby distinguishing the information demand by content. The ECB provides information that can be considered monetary news in the website subsection ‘Media’, whereas the subsections ‘Research & Publications’ and ‘Monetary Policy’ provide background and institutional information. Focussing on the accesses of the ‘Media’ subsection allows us to disentangle monetary news from other website information. For example, communication on interest rates at press conferences show up in the subsection ‘Media’. Strong increases in media attention on Governing Council meeting days confirm the importance of press conferences as a key communication event of the ECB (see Figure 1).

Google Analytics provides anonymous tracking of website visitors and relies on cookies which are stored on the user’s device. The tool tracks users who have initiated at least one session during the specified date range. A Unique Page View (UPV) aggregates page views that are generated by the same user during the same session. It refers to the number of sessions during which a website page was viewed. When a user visits a page several times during a session, it is counted as one UPV. Likewise, information about the number of visitors is available at the same frequency. The number of unique visitors refers to individuals visiting the ECB website and is measured by the visitor’s IP address.

 

Information demand drives inflation expectations
Taking a demand perspective, we analyse whether visitors’ activity on the ECB’s website influences private forecasts of future inflation and whether it reduces the gap between market forecasts and professional forecasters. Because previous studies on media attention measure the information supply derived from newspapers or TV, they only allow inference about whether agents were actively looking for the respective information, if information demand and supply are equal. Our approach based on search volumes of visitors is more targeted than supply-based approaches, since the proxy for information on demand captures the deliberate decision of agents to obtain more (or less) information on the ECB’s monetary policy.

There is a gap between experts’ inflation forecasts and inflation expectations by private agents (Figure 2). This study shows that website attention, as captured by visitor activity, influences euro area inflation expecta-tions. In a first step, we show that the public’s information demand for monetary news is driven by the (absolute) size of the ECB’s monetary policy shock and that it is also sensitive to different degrees of uncertainty and the complexity linked to non-standard monetary policy measures. In a second step, we show how these factors influence euro area inflation expectations.

Figure 2: Gap measures of euro area inflation expectations (percentages per annum)

Source: ECB, Thomson Reuters.
Notes: We show monthly observations. Gap_short (Gap_long) is the squared deviation between ILS1y1y (ILS5y5y) and the 5-year ahead inflation forecast from SPF (survey of professional forecasters).

In terms of methodology, a high frequency identification (HFI) is at the core of the econometric analysis. It explains (daily) movements in search activity on press conference days by coinciding (high-frequency) monetary policy shocks and controls. The HFI method has received particular attention in studies using financial asset prices that aim at disentangling the causal impact of monetary policy communication on financial asset prices.

Based on these regressions, we find that increased website attention contributes to narrowing the gap between market-based forecasts and (the mean of) longer-term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel.

Conclusion
Because of a tight two-way relationship between central banks and financial markets, there is a central role of financial market expectations in the conduct of monetary policy. For this reason, a central bank may not aim to directly reach all private actors, but its website-based communication can increase the awareness of consumers about central bank announcements. In this respect, both the website and the media are important transmission channels between the central bank and the public. In line with the predictions from theoretical communication models, this study shows that website attention, as captured by visitor activity, influences euro area inflation expectations and helps to close the gap between market-based inflation forecasts and longer-term professional expectations.

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About the authors   Alexander Jung is a Principal Economist and works in the Directorate General Monetary Policy of the European Central Bank. Before joining the ECB in 1999, he worked as Economist at the European Monetary Institute and the Deutsche Bundesbank. His research interests cover a wide range of topics in monetary economics and macroeconomics with a particular focus on monetary policy decision-making and communication. He holds a PhD in economics from the University of St. Gallen. Patrick Kühl worked at the Association for Financial Markets in Europe and the European Central Bank. He holds a Diploma in political science from the University of Frankfurt and a Doctorate in sociology from the University of Mainz.