Working Paper: CEPR ID: DP13438
Authors: Stephen Hansen; Michael McMahon; Matthew Tong
Abstract: Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England’s Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.
Keywords: Monetary Policy; Communication; Machine Learning
JEL Codes: E52; E58; C55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank communication (E58) | long-run interest rates (E43) |
| economic uncertainty (D89) | long-run interest rates (E43) |
| uncertainty channel (D89) | long-run interest rates (E43) |
| expectations channel (D84) | long-run interest rates (E43) |
| economic uncertainty (D89) | term premium (E43) |
| long-run rates (E43) | short-run rates (E43) |
| narrative signals linked to uncertainty (D80) | long-run yield movements (E43) |