Do Words Speak Louder than Actions? The Conduct of Monetary Policy at the Bundesbank

This paper proposes that an important tenet of monetary policy, as practiced by the Bundesbank, is how it communicates with the public. The results have implications for the conduct of monetary policy more generally. Indeed, recent Fed behavior may also be likened to the experience of the Bundesbank. We argue that communication by senior central bank officials represents an instrument of monetary policy which supplements discount rate changes or announcements of target growth rates for the money supply. Moreover, the communications instrument can help exlain how a central bank can deal with the uncertainties inherent in monetary policy not transmitted via frequent changes in in interest rates or money growth targets. Empirical evidence, using monthly data, shows how speeches, especially by the Bundesbank's President, are linked to interest rate behavior