The Importance of the Wording of the ECB

This paper analyzes the ECB communication, focusing in particular on its transparency dimension. We posit that if the ECB is transparent about its future policy decisions, then we should be able to forecast fairly well its future interest rate setting behavior. We find that the predicting ability of the European monetary authority's words is similar to the one implied by market-based measures of monetary policy expectations. Moreover, the ECB's wording provides complementary, rather than substitute, information with respect to economic and monetary variables