The Effect of Informal Central Bank Communication: Machine Learning Approach

Abstract

The management of agents’ expectations is a key feature of monetary policy because the central bank only has direct control over very short-term interest rates. The main tool to influence people’s expectations is communication. A number of both qualitative formal (e.g. statements and minutes) and informal (speeches) channels as well as quantitative channels, such as economic projections, are currently used by policymakers. Therefore, an in-depth understanding of the effects of central bank communication can contribute to effective monetary policy. For instance, it may help the European Central Bank to phase out the quantitative easing without causing severe instability. It is important to emphasise that this research is not about explicit forward guidance but instead focuses on the overall positive or negative sentiment (tone) about economic conditions in speeches. The paper investigates three hypotheses regarding the effect of positive or negative sentiment (tone) about economic conditions conveyed in Bank of England speeches on government bond yields in the United Kingdom: (H1) A positive sentiment (tone) about economic conditions conveyed in speeches should have a positive effect on bond yields. (H2) The impact of a speech should vary by the position of a speaker. Speeches by more senior people should have a larger effect. (H3) The stock of communication matters. If there was little communication prior to the speech, the impact of a speech should be larger.