Financial Stability Governance and Central Bank Communications

We investigate how central banks' financial stability governance frameworks influence their financial stability communication strategies and their effectiveness in preventing financial stress. Using data for 24 central banks, we test how communication strategies and their effectiveness depend on the powers assigned to these institutions. We find robust evidence that communications by central banks represented in interagency financial stability committees with more powers are more effective in mitigating a deterioration in financial conditions. These central banks also use macroprudential tools more consistently with their communications and, after conditions deteriorate, transmit a calmer message, suggesting that the ability to use macroprudential tools strengthens incentives not to just "cry wolf."