Working Paper: CEPR ID: DP17728
Authors: Rayane Hanifi; Klodiana Istrefi; Adrian Penalver
Abstract: In this paper we examine how central bankers communicate confidence and uncertainty in their narrative about the state of the economy when deciding policy, and how this communication relates to their policy decisions. We use text analysis techniques to construct forward and backward looking sentiment measures of policymakers' confirmation and surprise from the published Minutes of the Federal Reserve, the Bank of England and the European Central Bank. We show that the communication of confirmation and surprise has statistical power to explain monetary policy decisions, and that both types of communication convey signals. Our results suggest that policymakers signal policy easing when communicating higher uncertainty and surprise, and a lower likelihood of easing when confirming trends. The latter is explained by the intensity of the inflation topic in confirmation quotes, whereby a higher confirmation with regard to inflation indicates a higher confidence of policymakers to tighten policy.
Keywords: central banks; monetary policy; communication; uncertainty
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 |
|---|---|
| higher proportion of surprise expressions (D80) | easier monetary policy stance (E52) |
| higher proportion of confirmation expressions (C52) | tighter monetary policy stance (E63) |
| expressed surprise (Y60) | policy changes towards easing (E69) |
| expressed confirmation (Y60) | likelihood of tighter policy stance (E52) |
| expressed surprise regarding real economy (F49) | expressed surprise regarding inflation (E31) |