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Risk and Uncertainty in Central Bank Signals: An Analysis of MPC Minutes

Author

Listed:
  • Sheila Dow

    () (Department of Economics, University of Stirling)

  • Matthias Klaes

    () (Keele University, Centre for Economic Research)

  • Alberto Montagnoli

    () (Department of Economics, University of Stirling)

Abstract

This paper analyses the signal uncertainty implicit in the communications of the Bank of England's Monetary Policy Committee (MPC). Unlike previous studies, which seek to construct a qualitative uncertainty index that heavily relies on subjective interpretations of key expressions, we limit ourselves to lexical frequencies of those expressions. We establish seasonality in the term 'risk' that coincides with Inflation Report publication dates, and matches what we identify as a surprising degree of prima facie seasonality in interest rate changes. Our findings suggest that frequencies of key terms expressing signal uncertainty in MPC minutes may either yield proxy measures to the amount of information at the disposal of the MPC, or offer evidence for the presence of an irreducible kind of signal uncertainty that shows up as white noise, casting doubt on the soundness of the various qualitative uncertainty indices found in the literature.

Suggested Citation

  • Sheila Dow & Matthias Klaes & Alberto Montagnoli, 2007. "Risk and Uncertainty in Central Bank Signals: An Analysis of MPC Minutes," Keele Economics Research Papers KERP 2007/05, Centre for Economic Research, Keele University.
  • Handle: RePEc:kee:kerpuk:2007/05
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    File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0705.pdf
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    Keywords

    MPC; signal uncertainty; central bank uncertainty; word frequencies; uncertainty index; seasonality;

    JEL classification:

    • 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
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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