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Financial market reaction to China's monetary policy communication: Does the crisis make a difference?

During the last two decades, the status of central bank communication is gradually rising. In order to reduce information asymmetry of the central bank and the public, central bank should strengthen communication with the public, which can guide the public expectation to better achieve monetary policy objectives. Using EGARCH model, this paper studies the effects of China's monetary policy communication on China's financial market from October 1, 2006 to March 31, 2014. Further, we asks whether a significant change occurred during the financial crisis of November 2007-December 2008. We find, first, that central bank communication has a significant impact on money market short-term rates and a certain effect on long-term interest rates, stock returns and exchange rate. Central bank communication can reduce financial market volatility. Second, central bank communication is even more market relevant during the subprime crisis. All in all, we should pay close attention to central bank communication and give full play the role of central bank communication in monetary policy operation in order to improve the forward-looking and effectiveness of monetary policy.