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Words are not all created equal: A new measure of ECB communication

Author

Listed:
  • Matthieu Picault

    (IÉSEG School Of Management [Puteaux])

  • Thomas Renault

    (IÉSEG School Of Management [Puteaux], PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne)

Abstract

We develop a field-specific dictionary to measure the stance of the European Central Bank (ECB) monetary policy (dovish, neutral, hawkish) and the state of the Eurozone economy (positive, neutral, negative) through the content of ECB press conferences. In contrast with traditional textual analysis, we propose a novel approach using term-weighting and contiguous sequence of words (n-grams) to better capture the subtlety of central bank communication. We find that quantifying ECB communication using our field-specific weighted lexicon helps to explain future ECB monetary decisions when considering an augmented Taylor rule. Regarding European stock market volatility, we find that markets are more (less) volatile on the day following a conference with a negative (positive) tone about the euro area economic outlook. Our indicators significantly outperform a textual classification based on the Loughran–McDonald or Apel–Blix Grimaldi dictionaries and a media-based measure of economic policy uncertainty.

Suggested Citation

  • Matthieu Picault & Thomas Renault, 2017. "Words are not all created equal: A new measure of ECB communication," Post-Print hal-03205121, HAL.
    • Handle: RePEc:hal:journl:hal-03205121
    DOI: 10.1016/j.jimonfin.2017.09.005
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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