Release date: Feb. 21, 2006
Contact: Elaine Justice at 404-727-0643 or elaine.justice@emory.edu

Fed Chairman: Saying Too Much Has Downside, Say Emory Economists

Federal Reserve chairman Ben Bernanke may be interested in increasing the amount of transparency of Federal Reserve actions to the markets, but a study by Emory economists Robert Chirinko and Christopher Curran showed that saying too much can have its downside.

In a paper studying former Fed chairman Alan Greenspan titled "Greenspan Shrugs: Formal Pronouncements, Bond Market Volatility and Central Bank Communications," Chirinko and Curran studied three types of pronouncements from the former Fed chairman: speeches, testimonies and Federal Open Market Committee meetings. They studied the relationship between these communications and their relationship to the volatility of the 30–year U.S. Treasury bond futures market over a three–year period.

What they found surprised them: Volatility in the bond market increased not after but prior to Greenspan's actual speeches.

The link between Greenspan's pronouncements and market volatility "has several important policy implications, including the possibility that one or more aspects of the [communications] may be counterproductive," write the authors. "More generally, it raises questions about the optimal communication policy, how a central bank becomes transparent, and the appropriate means for releasing information to the public."

As Chirinko explains, current Fed chairman Bernanke may want to consider the impact of his remarks on market volatility. "Bernanke is interested in increasing the amount of transparency in central bank communication, but there's a possibility he could speak too much," says Chirinko. "I use the example of an art museum patron: When I go to a museum, I don't want to know about every brush stroke. I just want to know where the painting fits into the artist's portfolio. I can only take so much information. The bond market is the same way. To load it up with information may lead to excess market volatility."

Chirinko and Curran presented their findings at a recent meeting of the American Economic Association. Reach Chirinko at 404–727–6645 or rchirin@emory.edu. Reach Curran at 404–727–6355 or econcc@emory.edu.

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