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Up for count? Central bank words and financial stress

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  • Blix Grimaldi, Marianna

    ()
    (Monetary Policy Department, Central Bank of Sweden)

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    Abstract

    While knowing there is a financial distress 'when you see it' might be true, it is not particularly helpful. Indeed, central banks have an interest in understanding more systematically how their communication affects the markets, not least in order to avoid unnecessary volatility; the markets for their part have an interest in better deciphering the message of central banks, especially of course with regard to the conduct of future monetary policy. In this paper we use a novel approach rooted in textual analysis to begin to address these issues. Building on previous work from textual analysis, we are able to use quantitative methods to help identify and measure financial stress. We apply the techniques to the European Central Banks Monthly Bulletin and show that the results give a much more complete and nuanced picture of market distress than those based only on market data and may help improve how the Central Banks communication is designed and understood.

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    Bibliographic Info

    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 252.

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    Length: 46 pages
    Date of creation: 01 Apr 2011
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0252

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    Related research

    Keywords: Financial stress; central bank communication; textual analysis; logit distribution;

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    References

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    1. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
    2. Andrew Leigh & Justin Wolfers & Eric Zitzewitz, 2003. "What Do Financial Markets Think of War in Iraq?," NBER Working Papers 9587, National Bureau of Economic Research, Inc.
    3. David O. Lucca & Francesco Trebbi, 2009. "Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements," NBER Working Papers 15367, National Bureau of Economic Research, Inc.
    4. Morris Goldstein & Carmen M. Reinhart, 2000. "Assessing Financial Vulnerability: An Early Warning System for Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 100.
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