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The financial instability - Monetary policy nexus: Evidence from the FOMC minutes

Author

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  • Kanelis, Dimitrios
  • Kranzmann, Lars H.
  • Siklos, Pierre L.

Abstract

We analyze how financial stability concerns discussed during Federal Open Market Committee (FOMC) meetings influence the Federal Reserve's monetary policy imple- mentation and communication. Utilizing large language models (LLMs) to analyze FOMC minutes from 1993 to 2022, we measure both mandate-related and financial stability-related sentiment within a unified framework, enabling a nuanced examina- tion of potential links between these two objectives. Our results indicate an increase in financial stability concerns following the Great Financial Crisis, particularly dur- ing periods of monetary tightening and the COVID-19 pandemic. Outside the zero lower bound (ZLB), heightened financial stability concerns are associated with a reduc- tion in the federal funds rate, while within the ZLB, they correlate with a tightening of unconventional measures. Methodologically, we introduce a novel labeled dataset that supports a contextualized LLM interpretation of FOMC documents and apply explainable AI techniques to elucidate the model's reasoning.

Suggested Citation

  • Kanelis, Dimitrios & Kranzmann, Lars H. & Siklos, Pierre L., 2025. "The financial instability - Monetary policy nexus: Evidence from the FOMC minutes," Discussion Papers 13/2025, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:319627
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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