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Dovish Coos or Hawkish Screech? From Central Bank Talk to Economic Walk

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  • Kerstin Bernoth

Abstract

This paper investigates the effectiveness of the European Central Bank’s (ECB) communication in shaping market expectations and real economic outcomes. Using a transformer-based large language model (LLM) fine-tuned to ECB communication, the tone of monetary policy statements from 2003 to 2025 is classified, constructing a novel ECB Communication Stance Indicator. This indicator contains forward-looking information beyond standard macro-financial variables. Identified communication shocks are distinct from monetary policy and central bank information shocks. A structural Bayesian VAR reveals that hawkish communication signals favorable economic prospects, raising output, equity prices, and inflation, but also increases bond market stress. These findings highlight communication as an independent and effective tool of monetary policy, while also underscoring the importance of carefully calibrating tone to balance market expectations, and financial stability.

Suggested Citation

  • Kerstin Bernoth, 2025. "Dovish Coos or Hawkish Screech? From Central Bank Talk to Economic Walk," Discussion Papers of DIW Berlin 2137, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2137
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • 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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