A Quantitive Assessment of the Qualitative Aspects of Chairman Greenspan's Communications

A manifestation of the Federal Reserve Board's increased transparency has been Chairman Greenspan's method of communication. The purpose of this paper is to establish the positive aspects of his speeches, testimonies and FOMC statements on financial market variables. This analysis is undertaken using daily data since the middle of 1999, that is the period after which the FOMC provided statements after every FOMC meeting. Using content analysis, we calculate for each communication a measure of its certainty, pessimism, optimism, activity, immediacy and jargon. We then include these variables in standard regression to see if these language variables can help to forecast movements in financial market variables. We find that Chairman Greenspan's language does indeed forecast movements in financial market variables at the same day and 10 day horizons. In particular, FOMC statements contribute substantially to help predict same day and 10 day variation in these measures, though testimonies also contribute to predicting movements at the 10 day horizon. We conclude by arguing that given the given our evidence that Chairman's language predicts movements in the federal funds futures rates and Treasury forward rates, that this is consistent with the beneficial goals from enhanced central bank communications