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Does it Pay to Watch Central Bankers' Lips? The Information Content of ECB Wording

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  • Heinemann, Friedrich
  • Ullrich, Katrin

Abstract

In this analysis, the informational content of central bank rhetoric is assessed based on the experience with the ECB since 1999. Among the ECB?s communication channels we focus on the monthly press conferences. Based on a counting of certain signal words we construct a wording indicator reflecting the ?hawkishness? of monetary rhetorics. For the construction, we develop an objective algorithm representing a learning process of ECB observers. We then integrate this indicator into a standard Taylor type ordered probit model for the explanation of the interest rate. We show that the wording indicator can improve the model?s fit when added to the standard explanatory variables. However, a model based solely on this indicator performs worse than the baseline. The results are confirmed by out of sample analysis where the determination of the wording indicators? weights is based on the early ECB period which, subsequently, is excluded from the tests. Our conclusion is that linguistic analysis can improve but not substitute more rigorous forecasting techniques based on hard economic data. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 05-70.

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Date of creation: 2005
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Handle: RePEc:zbw:zewdip:4553

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Keywords: Taylor rule; wording; central bank communication;

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References

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  1. Carlo Rosa & Giovanni Verga, 2005. "The Importance of the Wording of the ECB," CEP Discussion Papers dp0694, Centre for Economic Performance, LSE.
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  17. Marcel Fratzscher, 2004. "Communication and exchange rate policy," Working Paper Series 363, European Central Bank.
  18. Petra Gerlach-Kristen, 2004. "Is the MPC's Voting Record Informative about Future UK Monetary Policy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 299-313, 06.
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