Effects of reputation and monetary policy communication on exchange rate uncertainty: evidence from an emerging market economy

Abstract

This paper examines whether central bank reputation and communication attenuated exchange rate uncertainty in Colombia over 2007-21. Uncertainty is measured by means of disagreements and forecast errors of the dollar exchange rate. We construct a central bank reputation index, an index of the clarity of its policy meeting minutes, and a measure of central bank board dissent. We control for the Colombia – US interest rate differential, inflation expectations disagreement, economic policy uncertainty, and special oil industry factors. We estimate equations via GMM and assess robustness with ARDL and VAR models. The findings indicate that a stronger central bank reputation and clearer communication reduce exchange rate uncertainty. Unanimous monetary policy decisions reduce disagreements concerning expectations, while external shocks such as new fracking activities exacerbate volatility. These results underscore the importance of enhancing transparency and cohesion in monetary policy decisions to mitigate uncertainty in foreign exchange markets.