An LLM Approach to Study Expectation Management Frictions under China's Dual-Track Regulation and Multi-Objective Constraints

Expectation management is a critical yet challenging task for central banks, particularly within the Chinese context of dual-track regulation and multi-objective constraints. This paper investigates the transmission efficacy of the People's Bank of China's (PBoC) forward guidance by proposing an LLM-powered analytical framework. First, we employ adaptive semantic segmentation to partition communication texts based on genuine meaning shifts. Second, we apply tense-by-topic tagging to precisely separate forward-looking signals from retrospective ones and isolate monetary policy stances from macroeconomic assessments and other auxiliary themes. Third, we further decompose these forward-looking policy stance units into granular signals regarding overall tone, quantity tools, price tools, and targeted objectives, and subsequently classify these signals as accommodative, neutral, or tight. Based on this granular data, we construct three specialized indices: forward-looking net policy intention (NPSf), quantity-price signal divergence (QPSD), and multi-objective communication dispersion (MDI). Controlling for actual policy operations and macroeconomic variables, we employ local projections to identify the dynamic effects and friction mechanisms of expectation management. Empirical results reveal that forward-looking monetary policy communication is the cornerstone of expectation management, whereas retrospective statements have been fully priced in by the market. Specifically, the credit channel functions effectively; forward-looking intentions drive substantive adjustments in credit growth, real financing costs, and risk premiums. Conversely, transmission through interest rate expectations and asset price channels remains limited. Further analysis demonstrates that price-quantity signal divergence systematically weakens transmission across all channels. Moreover, multi-objective communication triggers an overshooting response in both short-term money market benchmarks and credit risk premiums, while objectively dampening the pricing sensitivity of equity assets. We suggest that central bank expectation management should prioritize strengthening forward-looking path guidance, supported by highly coordinated price-quantity signals and clearly defined dominant objectives, to enhance policy efficacy.