Does the Clarity of Inflation Reports Affect Volatility in Financial Markets?

Abstract

We study whether clarity of central bank inflation reports affects return volatility in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level, a standard readability measure. We find some evidence, mainly for the euro area, of a negative relationship between clarity and market volatility prior to and during the early stage of the global financial crisis. As the crisis unfolded, there is no longer robust evidence of a negative connection. We conclude that reducing noise using clear reports is possible but not without challenges, especially in times of crisis.

Keywords: Inflation, Central banks, Public information, Capital market volatility, Financial markets, central bank communication, clarity, inflation reports, monetary policy, stock returns, stock market, national bank, monetary fund, bonds, government bonds, stock index, financial stability, bond yields, monetary policy decisions, monetary policies, government bond yields, financial volatility, monetary authorities, financial instruments, stock market volatility

JEL Classification: E44, E58, E52