Central Bank Communication Strategy and Tools#
Communication Strategy and Tools for the Central Bank of Cambodia
Background#
Cambodia, a highly dollarized economy, faces significant constraints in implementing independent monetary policy. Despite the expansion of the use of its national currency, the Riel, based on high growth in the 2000s, the Central Bank of Cambodia (National Bank of Cambodia, NBC) is challenged by the underdevelopment of its financial market, making it difficult to possess modern monetary policy tools.
In a situation where market mechanisms for monetary policy are insufficient, it is even more urgent to build appropriate monetary policy communication tools and strategies than in economies with advanced monetary policy tools. This is crucial to minimize policy uncertainty that may arise in the process of de-dollarization and modernization of monetary policy implementation.
Scope of the Proposal#
This proposal aims to:
Summarize and evaluate the development process and effectiveness of monetary policy communication tools and strategies in the Korean economy.
Based on the analysis of Korea’s experience, propose effective monetary policy communication tools and strategies for Cambodia, considering its stage of economic development.
Evaluate the current communication strategies and effects of the NBC in the unique Cambodian monetary policy environment of dollarization, and propose alternatives.
Characteristics and Direction of the Proposal#
Our research team brings a wealth of experience, including careers at the Bank of Korea and policy analysis projects. We plan to go beyond traditional analysis methods and utilize text mining and machine learning techniques optimal for analyzing communication effects.
Central bank communication, once a discretionary policy tool, has recently been recognized as a necessary policy tool [Haldane et al., 2020] and needs to be widely conducted for the general public [Blinder et al., 2008]. Communication with the general public requires 3E (Education, Explanation, and Engagement), which means explaining the current situation to the public and building trust by fulfilling what has been conveyed.
To meet these conditions, it is necessary to check in advance and after how much the communication implemented by the central bank as a policy tool can be understood and conveyed to the public. This check system can be built by measuring the tone using text mining and checking the impact of the tone on the financial and foreign exchange markets.
Lee et al. [2019] built a sentiment lexicon that can analyze the tone of the minutes of the Monetary Policy Committee of the Bank of Korea, revealing that the tone of the minutes has predictive power for policy interest rates. They also found that the tone index significantly affects stock and bond market price variables.
We propose to build a sentiment lexicon using past communication materials and related articles from the Central Bank of Cambodia. With the recent development of large artificial intelligence language models, it is possible to build a sentiment lexicon with significantly improved accuracy and precision compared to the past. We plan to use the Low Resource Language Model to build a Khmer sentiment lexicon.
Furthermore, we propose to build a system for external communication using Generative AI, such as the currently developing and starting to be distributed GPT-4. This is expected to enhance external communication capabilities and contribute to stabilizing the foreign exchange and financial markets to achieve the policy goal of de-dollarization.
References#
Alan S Blinder, Michael Ehrmann, Marcel Fratzscher, Jakob De Haan, and David-jan Jansen. Central bank communication and monetary policy: a survey of theory and evidence. Journal of economic literature, 46(4):910–945, 2008.
Andrew Haldane, Alistair Macaulay, and Michael Mcmahon. The 3 e's of central bank communication with the public. Available at SSRN 3518605, 2020.
Young Joon Lee, Soohyon Kim, and Ki Young Park. Deciphering monetary policy board minutes with text mining: the case of south korea. Korean Economic Review, 35(2):471–511, 2019.