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Words and deeds in managing expectations: empirical evidence on an inflation targeting economy

Author

Listed:
  • Paweł Baranowski

    () (University of Łódź)

  • Wirginia Doryń

    () (University of Łódź)

  • Tomasz Łyziak

    () (Narodowy Bank Polski)

  • Ewa Stanisławska

    () (Narodowy Bank Polski)

Abstract

The conduct of monetary policy nowadays involves not only interest rate decisions but also central bank communication, aimed at managing the expectations of the private sector. In this paper, we apply epidemiological model to private-sector experts’ forecasts regarding interest rates and inflation in Poland—an economy with over 20 years of inflation targeting history. We show that both of these factors affect interest rates and inflation expectations. Our study contributes to the literature by including a wide set of factors affecting expectations with a special focus on central bank decisions, projections and the tone of official documents. In general, the textual content of monetary policy minutes affects experts’ expectations more at the shortest horizons (nowcasts and one quarter ahead), while GDP and inflation projections released by the central bank play a larger role for slightly longer horizons (two quarters ahead or longer). As far as monetary policy actions are concerned, a positive interest rate surprise produces an upward shift in the whole path of interest rate expectations and leads to a decrease in one-year-ahead inflation expectations.

Suggested Citation

  • Paweł Baranowski & Wirginia Doryń & Tomasz Łyziak & Ewa Stanisławska, 2020. "Words and deeds in managing expectations: empirical evidence on an inflation targeting economy," NBP Working Papers 326, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:326
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    central bank communication; inflation expectations; interest rate expectations; text mining;

    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

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