Small notes, big impact: Enhancing monetary policy transmission through central bank communication

Central bank communication helps to optimize monetary policy. This paper uses a quasi-natural experiment to identify open market operation notices (“small notes”). It investigates how this implementation narrows the deviation of the market interest rate from its policy-intended level. We further evaluate the heterogeneous effects of liquidity comments of “small notes” on interest rate spreads. Our results suggest that OMO “small notes” improve the central bank transparency and close the gap between the market interest rate and its policy-intended level and that all liquidity comments of “small notes” enhance the effectiveness of monetary policy transmission to some extent, with “excessive liquidity” comments being the most effective. These outcomes prove that “small notes” may have the potential as a regular monetary policy communication mechanism. • OMO “small notes” enhance the transmission efficiency of the policy interest rate. • Increased information disclosure in OMO “small notes” reduces the spread between short-term market rates and the policy rate. • Liquidity comments in OMO “small notes” have heterogeneous effects: comments indicating “excessive liquidity” improve policy rate transmission more effectively than those indicating “liquidity shortage.”