Working Paper: CEPR ID: DP17773
Authors: Michael Ehrmann; Paul Hubert
Abstract: How do financial markets acquire information about upcoming monetary policy decisions, beyond their reaction to central bank signals? This paper hypothesises that sharing information among investors can improve expectations, especially in the presence of disagreement or uncertainty about the economy. To test this hypothesis, the paper studies monetary policy-related content on Twitter during the “quiet period” before European Central Bank announcements, when policymakers refrain from public statements related to monetary policy. Conditional on large disagreement about the economic outlook, higher Twitter traffic is associated with smaller monetary policy surprises, suggesting that exchanging private signals among investors can help improve expectations.
Keywords: central bank communication; quiet period; twitter; market expectations; information processing
JEL Codes: D83; E52; E58; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher Twitter traffic during the ECB's quiet period (C41) | Smaller monetary policy surprises (E49) |
| High disagreement about the economic outlook + Increase in Twitter traffic (E32) | Decrease in the magnitude of monetary policy surprises (E39) |
| Increased information exchange among market participants (G14) | More accurate expectations regarding monetary policy (E49) |
| Tweets discussing monetary policy (E52) | More accurate market expectations (D84) |
| Expert and non-expert tweets (C91) | Enhanced accuracy of market expectations (D84) |