Working Paper: CEPR ID: DP17295
Authors: Phillipp Gnan; Maximilian Schleritzko; Maik Schmeling; Christian Wagner
Abstract: We decipher monetary policy shocks by directly connecting them to the stance a central bank expresses in its communication about different topics. To measure topic-specific central bank stances, we apply textual analysis techniques to press conference statements of the European Central Bank (ECB). Using three sets of shocks established in the literature, based on either high-frequency market reactions in singleinterest rates, the entire term structure, or the joint response in interest rates and stock prices, we find that markets distinctively react to news on the topics rate guidance, economic activity, and financial and monetary conditions. Likewise, responses in sovereign yield spreads and exchange rates can be directly linked to specific topics. Our findings provide validation for price-based monetary policy shocks used in numerous studies in monetary economics and asset pricing. They should also prove useful for the optimal design of policy communication.
Keywords: monetary policy shocks; central bank communication; asset pricing; textual analysis
JEL Codes: G10; G12; E43; E44; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Changes in the ECB’s stance on topics such as rate guidance, economic activity, and financial conditions (E52) |
| Unexpected hawkish change in rate guidance (E52) | Increase in the OIS 3-month rate (E43) |
| One-standard deviation increase in the ECB's positive tone regarding economic activity (E52) | Increase in the 2-year rate (E43) |
| Positive stance on financial conditions (E66) | Increase in the 10-year rate (E43) |
| Changes in the ECB’s stance on fiscal policy (E63) | Affect sovereign yield spreads (E43) |