September 2021

Financial Stability Governance and Central Bank Communications

Juan M. Londono, Stijn Claessens, Ricardo Correa

Abstract:

We investigate how central banks' governance frameworks influence their financial stability communication strategies and assess the effectiveness of these strategies in preventing a worsening of financial cycle conditions. We develop a simple conceptual framework of how central banks communicate about financial stability and how communication shapes the evolution of the financial cycle. We apply our framework using data on the governance characteristics of 24 central banks and the sentiment conveyed in their financial stability reports. We find robust evidence that communications by central banks participating in interagency financial stability committees more effectively mitigate a deterioration in financial conditions and advert a potential financial crisis. After observing a deterioration in conditions, such central banks also transmit a calmer message, suggesting that the ability to use policy tools other than communications strengthens incentives not to just "cry wolf".

DOI: https://doi.org/10.17016/IFDP.2021.1328

PDF: Full Paper

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Last Update: September 10, 2021