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The long-run information effect of central bank communication

Author

Listed:
  • Stephen Hansen

    (University of Oxford)

  • Michael McMahon

    (University of Oxford)

  • Matthew Tong

    (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

  • Stephen Hansen & Michael McMahon & Matthew Tong, 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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    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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