Central Bank Sentiment and Policy Expectations

Paul Hubert and Fabien Labondance

No 2016-07, Working Papers from CRESE

Abstract: We explore empirically the theoretical prediction that waves of optimism or pessimism may have aggregate effects, in the context of monetary policy. We investigate whether the sentiment conveyed by ECB and FOMC policymakers in their statements affect the term structure of private short-term interest rate expectations. First, we quantify central bank tone using a computational linguistics approach. Second, we identify sentiment as exogenous shocks to these quantitative measures using an augmented narrative approach following the information friction literature. Third, we estimate the impact of sentiment on private agents' expectations about future short-term interest rates using a high-frequency methodology and an ARCH model. We find that sentiment shocks increase private interest rate expectations around maturities of one and two years. We also find that this effect is non-linear and depends on the state of the economy and on the characteristics (precision, sign and size) of the sentiment signal.

Keywords: Animal spirits; Optimism; Confidence; Central bank communication; Interest rate expectations; ECB; FOMC (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Central bank sentiment and policy expectations (2017)
Working Paper: Central Bank sentiment and policy expectations (2017)
Working Paper: Central Bank sentiment and policy expectations (2017)
Working Paper: Central Bank sentiment and policy expectations (2016)
Working Paper: Central Bank Sentiment and Policy Expectations (2016)
Working Paper: Central Bank Sentiment and Policy Expectations (2016)
Working Paper: Central Bank Sentiment and Policy Expectations (2016)
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