Media Coverage and ECB Policy-Making: Evidence from an Augmented Taylor Rule

Media coverage of ECB's policy decisions has an impact on financial market expectations, and thus, on the monetary policy objectives of the ECB. In this article, we use a computational linguistic approach to extract the uncertainty tone emerging from media coverage of ECB's policy decisions during the period 1999M01–2014M08, the Media Uncertainty Index (MUI). We then relate the MUI to the interest rate setting procedure of the ECB. Our results suggest that the monetary institution implements an accommodative (restrictive) monetary policy in response to an increase (decrease) of the degree of uncertainty expressed by the media. Additional extensions show that (i) the ECB is more responsive to the uncertainty captured by the MUI in the pre-crisis era, while in the post-crisis era the ECB is more concerned by the uncertainty of the overall economic environment, as captured by the Economic Policy Uncertainty index (Baker et al., 2016) and that (ii) it (also) reacts to media's expressed uncertainty through its unconventional policy measures. Our findings shed some new light on the decision-making process of the ECB when it has to deal with the uncertainty ensuing from its past policy decision and the uncertainty of the overall economic environment, and thus, address an important issue related to the political economy of central banking.