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Monetary Policy Narratives and the Transmission of Monetary Policy

Author

Listed:
  • Alexa Kaminski

    (University of Zurich)

  • Alistair Macaulay

    (University of Surrey)

  • Wenting Song

    (UC Davis)

Abstract

This paper studies how the transmission of monetary policy varies with monetary policy narratives. Using an AI-based data classification algorithm guided by macroeconomic theory, we construct directed graphs of the causal mechanisms described in FOMC transcripts, which capture the narratives used to justify interest rate decisions. Even after purging these narratives of predictable components from contemporaneous macroeconomic conditions, we find substantial variation in narratives over time. Clustering the residual graphs yields three recurring types: an inflation narrative, a finance narrative, and a textbook narrative. Narrative-conditioned local projections reveal that the transmission of monetary policy is strongly narrative dependent, no narrative cluster exhibits the canonical joint decline in inflation and output, and the price puzzle is narrative specific. These results suggest that standard shock measures average over heterogeneous policy episodes and that narrative measurement provides a practical way to operationalize this heterogeneity.

Suggested Citation

  • Alexa Kaminski & Alistair Macaulay & Wenting Song, 2026. "Monetary Policy Narratives and the Transmission of Monetary Policy," School of Economics Discussion Papers 0126, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0126
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    File URL: https://repec.som.surrey.ac.uk/2026/DP01-26.pdf
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    More about this item

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • 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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