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Central bank tone and the dispersion of views within monetary policy committees

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  • Paul Hubert

    (Observatoire français des conjonctures économiques)

  • Fabien Labondance

    (Observatoire français des conjonctures économiques)

Abstract

Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1-year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we showthatcentral banktonehelps predicting future policy decisions.

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  • Paul Hubert & Fabien Labondance, 2019. "Central bank tone and the dispersion of views within monetary policy committees," Sciences Po publications 2019 – 08, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/3mgbd73vkp9f9oje7utooe7vpg
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    More about this item

    Keywords

    Animal spirits; Optimism; Confidence; FOMC; Central bank communication; Interest rate expectations; ECB; Aggregate effects;
    All these keywords.

    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
    • 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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