ECB monetary policy communication: does it move euro area yields?

In this paper we examine multiple dimensions of ECB monetary policy communication by identifying its sentiment and relation with the economic environment and financial markets. We quantify communication sentiment using transcripts from official ECB communication events – press conferences, accounts and Executive Board speeches – as well as media reactions that highlight the key messages of those events. Importantly, we create unique lexicons for both of those communication types. We find that the overall trends in the sentiment indices for the analysed communication events closely resemble the movements of monetary policy stance as well as macroeconomic indicators in the euro area, both before and after the COVID-19 shock period. The communication tone generally shifts in advance of actual monetary policy actions. Using regression analysis, we find some expected, statistically significant effects of press confer-ence sentiment on bank stock prices (information-type shock) and identify the impact of Executive Board speeches on euro area fiscal borrowing costs (short-term OIS rates). Fragmentation issues among euro area member states do not seem to be negatively affected by the sentiments of the ECB’s communication. Still, policy makers should be aware that the tone of their communication events is likely to affect particular financial markets.