Do actions speak louder than words? Evaluating monetary policy at the Bundesbank

This paper proposes that an important instrument of monetary policy of the Bundesbank is how it communicates with the public. We argue that communication by senior central bank officials represents an instrument of monetary policy that complements changes in interest rates. Moreover, the communications instrument can partly explain how a central bank can respond to real economic developments even as it focuses on an inflation objective. Using monthly data, we show how speeches by the Bundesbank's President dealing with inflation help explain both interest rate movements as well as the central bank's response to the unemployment rate.