Central Bank Communication and Forward Guidance Shocks

Abstract

Does it matter what the central bank had said during a monetary policy announcement? The paper proposes a new approach to identifying the effects of forward guidance taking into account what the central bank had said and how financial markets perceived it. I use computational linguistic methods to disentangle the topics the central bank was talking about during its announcements. Moreover, I found that newspapers cover monetary policy announcements and positivity/negativity of the coverage might serve as a proxy to what the markets have heard during the announcements. The study finds that the markets react to monetary policy announcements by incorporating the new information in the yield curve. Furthermore, financial markets are forward-looking and obtain information before its publication in newspapers.