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The long-run information effect of central bank communication

Author

Listed:
  • Hansen, Stephen

    (University of Oxford)

  • McMahon, Michael

    (University of Oxford)

  • Tong, Matthew

    (Bank of England)

Abstract

Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England’s Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.

Suggested Citation

  • Hansen, Stephen & McMahon, Michael & Tong, Matthew, 2019. "The long-run information effect of central bank communication," Bank of England working papers 777, Bank of England.
  • Handle: RePEc:boe:boeewp:0777
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    More about this item

    Keywords

    Monetary policy; communication; machine learning.;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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