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Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements

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  • David O. Lucca
  • Francesco Trebbi

Abstract

We present a new automated, objective and intuitive scoring technique to measure the content of central bank communication about future interest rate decisions based on information from the Internet and news sources. We apply the methodology to statements released by the Federal Open Market Committee (FOMC) after its policy meetings starting in 1999. Using intra-day financial quotes, we find that short-term nominal Treasury yields respond to changes in policy rates around policy announcements, whereas longer-dated Treasuries mainly react to changes in policy communication. Using lower frequency data, we find that changes in the content of the statements lead policy rate decisions by more than a year in univariate interest rate forecasting and vector autoregression (VAR) models. When we estimate Treasury yield responses to the shocks identified in the VAR, we find communication to be a more important determinant of Treasury rates than contemporaneous policy rate decisions. These results are consistent with the view that the FOMC releases information about future policy rate actions in its statements and that market participants incorporate this information when pricing longer-dated Treasuries. Finally, we decompose realized policy rate decisions using a forward-looking Taylor rule model. Based on this decomposition, we find that FOMC statements contain significant information regarding both the predicted rule-based interest rate and the Taylor-rule residual component, and that content of the statements leads the residual by a few quarters.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15367.

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Date of creation: Sep 2009
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Handle: RePEc:nbr:nberwo:15367

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Cited by:
  1. Pierre L. Siklos, 2013. "The Global Financial Crisis and the Language of Central Banking: Central Bank Guidance in Good Times and in Bad," CAMA Working Papers 2013-58, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. repec:fce:doctra:13-03 is not listed on IDEAS
  3. Paul Hubert, 2013. "FOMC forecasts as a focal point for private expectations," Documents de Travail de l'OFCE 2013-12, Observatoire Francais des Conjonctures Economiques (OFCE).
  4. Refet S. Gürkaynak & Jonathan H. Wright, 2013. "Identification and Inference Using Event Studies," Manchester School, University of Manchester, vol. 81, pages 48-65, 09.
  5. Scott Hendry & Alison Madeley, 2010. "Text Mining and the Information Content of Bank of Canada Communications," Working Papers 10-31, Bank of Canada.
  6. Paul Hubert, 2011. "Central Bank Forecasts as an Instrument of Monetary Policy," Documents de Travail de l'OFCE 2011-23, Observatoire Francais des Conjonctures Economiques (OFCE).
  7. Allard, Julien & Catenaro, Marco & Vidal, Jean-Pierre & Wolswijk, Guido, 2013. "Central bank communication on fiscal policy," European Journal of Political Economy, Elsevier, vol. 30(C), pages 1-14.
  8. Blix Grimaldi, Marianna, 2011. "Up for count? Central bank words and financial stress," Working Paper Series 252, Sveriges Riksbank (Central Bank of Sweden).
  9. Born, Benjamin & Ehrmann, Michael & Fratzscher, Marcel, 2010. "Macroprudential policy and central bank communication," CEPR Discussion Papers 8094, C.E.P.R. Discussion Papers.
  10. Elizabeth Demers & Clara Vega, 2008. "Soft information in earnings announcements: news or noise?," International Finance Discussion Papers 951, Board of Governors of the Federal Reserve System (U.S.).
  11. David O. Lucca & Emanuel Moench, 2011. "The pre-FOMC announcement drift," Staff Reports 512, Federal Reserve Bank of New York.
  12. Michael D. Bauer, 2011. "Nominal interest rates and the news," Working Paper Series 2011-20, Federal Reserve Bank of San Francisco.

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