Clarity of central bank communication and the effect of macroprudential measures: a new issue of the Russian Journal of Money and Finance
The third 2021 issue of the scholarly Russian Journal of Money and Finance published by the Bank of Russia has been released.
The transparency of central bank communication is a key factor in effective inflation targeting: understanding strengthens credibility, which helps manage inflation expectations. Evaluation of the readability of central banks’ communications performed by foreign researchers shows that their texts are rather difficult to comprehend. The first research on the quality of Bank of Russia communication has been performed by Alina Evstigneeva and Mark Sidorovskiy (Bank of Russia), who explore the readability of the text (press releases, announcements, reports) used by the Bank of Russia to communicate its monetary policy. The authors apply a neural network trained on an array of various texts (from fiction to federal laws) classified by degree of complexity. The analysis shows that in the period of 2013–2021, the Bank of Russia’s texts became more understandable to the broad public, while during the crisis of 2014–2015 and periods of market volatility, the complexity of communication required some economic background from the reader.
Exports and imports have a significant impact on the gross domestic product in Russia. Hence, qualitative forecasts of foreign trade volumes are essential both for shaping state policy and for GDP forecasting. Ksenia Mayorova and Nikita Fokin (RANEPA) compare the quality of nowcasting of Russian imports and exports by commodity groups applying several models. According to the authors, the best-performing approach is to use weighted average forecasts based on several machine learning models.
Understanding the risks accepted by banks when advancing loans to corporate borrowers and when creating loss provisions require a more accurate assessment of the default probability of such loans. Anna Burova and co-authors (Bank of Russia) develop a model for probability of default using data from Russian credit history bureaus on debts overdue by more than 90 days. The authors identify statistically significant relationships between ratios derived from corporate financial statements and subsequent default events over a one year horizon.
Central banks tend to resort to macroprudential regulation to discourage the issuance of high-risk loans that may entail risks to financial stability. However, such measures do not always produce the intended effect. Dmitry Miroshnichenko (Bank of Russia) examines the effectiveness of the Bank of Russia’s decision to introduce (from October 2019) risk weight add-ons depending on borrowers’ debt burden. The author concludes that after the add-ons were implemented, the share of high-risk loans in the portfolio of certain banks increased. A more effective measure could therefore be a direct restriction on banks lending to borrowers with the maximum value of the debt burden indicator.
Measurement of the effects of macroprudential policies was the focus of an international online workshop hosted by the Bank of Russia and the New Economic School in June 2021. The published workshop review suggests that macroprudential policy measures against high-risk lending may result only in a change in loan portfolio structures, rather than a reduction in risks. For example, in Ireland, banks that were required by the regulator to reduce the number of high-risk loans advanced turned to an increase in high-risk corporate lending.
The full version of the Russian Journal of Money and Finance (No. 3, 2021) is available on its website.