Central Bank Communication Research Articles

Central Bank Communication and Financial and Macro Variables: The Case of European Inflation Targeters

ABSTRACT This paper investigates the effect of central bank communication on financial (interest and exchange rates) and macro (inflation and production) variables in twelve European inflation targeters in 2012–2018. After deriving the tone and topics of communications from policy releases, a heterogeneous panel SVAR is estimated. The results show that the communication effect exists mostly for financial variables; a more pronounced response was found for domestic shocks. The study contributes to the literature by covering economies not at the center of the economic discussion, as well as utilzing a model which can address different types of shocks.

Central bank communication and expectations: Evidence for inflation‐targeting economies

AbstractWe seek to investigate the effects of communication by central banks on professional and consumer inflation expectations. Accordingly, we investigate 12 small open economies implementing inflation targeting. The communication tone of the central banks is determined based on their post‐decision releases. We use computational linguistics to quantify this factor. With regard to two subsamples that are identified based on the central bank's experience in inflation targeting, we estimate panel models while controlling for other prospective drivers of expectations. The communication tone of a central bank significantly affects the expectations of professional forecasters from economies with more experience in inflation targeting.

The communication reaction function of the European Central Bank. An analysis using topic modelling

ABSTRACT Central bank communication plays a crucial role in the conduct of monetary policy, yet the research on central bank communication, while growing, is still scarce. In this paper, we analyze the communication reaction function of the European Central Bank (ECB) through topic-based indices derived from the bank’s speeches. These indices are used as dependent variables in policy and communication reaction function models, as suggested by recent literature. The topics are extracted using Latent Dirichlet Allocation (LDA), a popular text mining algorithm for topic extraction. The ECB has recently reviewed its monetary policy strategy, which led to an increase in studies incorporating the new methods offered by text mining for analyzing the policy reaction function of the bank. We show how indices built through topic modelling can be used to study the communication reaction function of a central bank, and we examine which variables are significant for every topic communicated by the ECB.

How does the central bank stabilize the stock market under macro uncertainty: Evidence from China stock market

This paper establishes mathematical models and PVAR models to verify the micro transmission path and the validity of central bank communication and actual interest rate intervention on China stock market. Through heterogeneity analysis, we further test whether the level of macroeconomic uncertainty affects their effect. We confirmthat both central bank communication and actual interest rate intervention have a significant effect. However, central bank communication is ineffective in the high macroeconomic uncertainty sample while the interest rate intervention can have a greater effect. Overall, the results suggest that central bank communication is a more effective monetary policy tool on stock market in low macroeconomic uncertainty period, while interest rate intervention is a better choice in high macroeconomic uncertainty period.

Central bank communication and corporate cash holdings

Central bank communication and corporate cash holdings

Central Bank Communication of Uncertainty

Central Bank Communication of Uncertainty

Digital communication of the Bank of Russia in social media

The subject of this study is digital communication of the Bank of Russia in social media. The relevance of the article is determined by the role and significance of modern digital communication channels in everyday life and the potential for their use in ongoing monetary policy. The authors systematize and summarize scientific articles devoted to the connection between effective communication and monetary policy pursued by central banks. The article notes that successful central bank communication should make monetary policy more predictable and market expectations about future rates more accurate. The purpose of the current article is to assess the readability of digital materials published by the Bank of Russia on official social networks and instant messengers. To assess the readability of digital publications, the authors identify two large audience groups: professional and non-professional. As a text analysis method, the authors rely on syntactic and lexical methods and use the Flesch-Kincaid index and Fog-Index as indicators of text readability. The authors presented the key channels and communication tools of central banks, and also highlighted the main channels of digital communication of the Bank of Russia: the Bank of Russia website, social media and the Bank of Russia application “Central Bank Online”. Each of the channels has both direct and indirect affiliation. The results of the direct affiliation channel of social media and the website emphasize the positive dynamics of readability indices – materials published on social networks by the Bank of Russia become clearer to a wider audience segment. However, most publications still require specialized training in economics and finance to fully understand the information. Thus, in communication on social networks, the Bank of Russia’s focus is on reaching a non-professional audience in order to increase transparency and the level of trust in its monetary policy.

Four Facts about International Central Bank Communication

Four Facts about International Central Bank Communication

The informational content of central bank communication for the energy market: the role of news versus surprises

ABSTRACT The reaction of asset prices to monetary and macroeconomic news announcements represents a rich source of information which is important to better understand the financial market impact of economic fundamentals. Given the significant connection of energy to other sectors in the economy, this study attempts to address to what extent the views that a central bank expresses in its communications get reflected in the energy stock market. The GARCH with Jump intensity approach is used to analyse the volatility of energy stock prices and to measure their reactions to anticipated and unanticipated policy news. Moreover, we assess whether central bank communications exert differential impacts on changes in energy stock prices under various time-horizons. Focusing on the European Union and the UK energy stocks, the paper finds evidence of a time-varying market responsiveness. For instance, a more hawkish stance is associated with an increase in the energy stock price jumps for the EU in the short- and medium-terms, whereas it only holds for the UK in the short-run. Although central bank policies do not target the exchange rate itself, we find that the exchange rate channel is an important part of the monetary policy transmission mechanism for the energy market.

Central Bank Communication and Leverage Differentiation of Non-Financial Enterprises

ABSTRACT As an expectation management policy, central bank communication can affect corporate market expectations, thus effectively guiding corporate investment and financing behavior. Based on the quarterly data of non-financial listed enterprises from 2007 to 2020, this paper analyzes the relationship between central bank communication and non-financial corporate leverage differentiation. The results show that central bank communication can reduce corporate leverage differentiation. The increase in the degree of bank credit discrimination can further amplify the inhibitory effect of central bank loose communication on the leverage differentiation of non-financial enterprises. The mechanism analysis shows that central bank communication can affect the leverage differentiation of non-financial enterprises by reducing financial mismatches, stabilizing the market expectation mechanism, and reducing managers’ myopia. The results of the extended analysis show that the central bank’s loose communication can inhibit the degree of leverage differentiation between zombie firms and non-zombie firms, and improve the dynamic adjustment speed of corporate capital structure.

New evidence from the monetary policy communication and inflation expectations nexus in Africa

Motivated by the dearth of evidence, we examine the impact of monetary policy communication on inflation expectations in Africa. Employing text-mining techniques to analyse the monetary policy statements of six African central banks, we compute a novel index of monetary policy communication (MPCI) using the extracted word counts, readability, sentiment and tone indicators. We provide new evidence of a positive and statistically significant impact of sentiments, tone and the MPCI on inflation expectations in Africa. Our results also reveal a rising influence of sentiments in anchoring expectations during the COVID-19 pandemic era. Our results are robust to alternative measures of inflation expectation and to global economic uncertainty. We recommend concise and lucid policy statements alongside statements with tone and policy decision consistency for anchoring inflation expectations. Furthermore, investors should carefully analyse and respond to signals from central bank communication, incorporating these insights into their investment strategies and risk management practices.

Can central banks be heard over the sound of gunfire?

AbstractIn this study, we examined the effectiveness of central bank communications during times of significant adverse shocks. Specifically, we examined how the National Bank of Ukraine (NBU) regulated foreign exchange (FX) markets during the Russo‐Ukrainian War in 2022. Data collected from both the black and authorized FX markets suggested that the content of the NBU's announcements significantly impacted FX market agents. Announcements aimed at maintaining a fixed (floating) FX rate prompted an increase (decrease) in the black market premium in cash transactions. Moreover, the NBU's announcements influenced the sale side of foreign currency more than any other aspect, an area where the black market FX traders held near monopolistic power.

CentralBankRoBERTa: A fine-tuned large language model for central bank communications

Central bank communications are an important tool for guiding the economy and fulfilling monetary policy goals. Natural language processing (NLP) algorithms have been used to analyze central bank communications. These outdated bag-of-words methods often ignore context and cannot distinguish who these sentiments are addressing. Recent research has introduced deep-learning-based NLP algorithms, also known as large language models (LLMs), which take context into account. This study applies LLMs to central bank communications and constructs CentralBankRoBERTa, a state-of-the-art economic agent classifier that distinguishes five basic macroeconomic agents and binary sentiment classifier that identifies the emotional content of sentences in central bank communications. The absence of large-language models in the central bank communications literature may be attributed to a lack of appropriately labeled datasets. To address this gap, we introduce our model, CentralBankRoBERTa, offering an easy-to-use and standardized tool for scholars of central bank communications.

Analysis of CBDC narrative by central banks using large language models

One topic that is gaining importance in central bank communication is central bank digital currency (CBDC). To better understand central banks’ stance towards CBDCs, we used different natural language processing techniques on a set of central bank speeches. We found that the sentiment calculated by Large Language Models, and in particular by ChatGPT, is the one that most resembles the sentiment identified by human experts in those same speeches. Our study suggests that LLMs are an effective tool for improving sentiment measurements on specific policy texts, although they are not infallible and may be subject to new risks.

COMMUNICATION OF THE CENTRAL BANK AS A DETERMINANT OF THE CREDIBILITY AND EFFECTIVENESS OF THE MONETARY POLICY ON THE EXAMPLE OF THE EUROPEAN CENTRAL BANK

The aim of the undertaken research is an attempt to explain, on theoretical and empirical grounds, the interdependence between central bank communication, its transparency credibility and,consequently, the effectiveness of monetary policy pursued by central banks. The study used research methods based on the literature analysis on the subject in the field of banking and finance, as well as statistical and econometric methods (Granger causality analysis and the generalised linear model – GLM). Literature studies are aimed at answering the question of what is the relationship between the transparency, credibility of the central bank and the effectiveness of monetary policy in theoretical terms. However, the empirical research studies aim to confirm the hypothesis (H0) or reject the hypothesis (H1) about the causal relationships between the variables mentioned. Empirical analyses were conducted on the example of the European Central Bank, which, from the point of view of its monetary policy, is characterised by relatively high efficiency, relatively effectively stabilising inflation in the monetary union. All statistics used in the study were taken from databases of the International Monetary Fund (IMF World Economic Outlook), the European Union statistical office (Eurostat) and the Organisation for Economic Cooperation and Development (OECD) (OECD Data). The analysis covers the period from 2010 to 2022 based on monthly data. The results of the research confirmed the existence of the null hypothesis (i.e., the significant impact of communication, transparency and credibility of the European Central Bank on the effectiveness of monetary policy in the Euro area). The results of the conducted research may be a starting point for further, more in-depth research on the relationship between communication, transparency, credibility and effectiveness of central banks in countries with different levels of economic development.

Consumers' macroeconomic expectations

AbstractAfter the financial crisis of 2008, central banks around the world have increased their communication efforts to reach consumers, with the aim of both guiding and anchoring their inflation expectations. For the expectations channel of monetary policy to work as intended, central banks need a thorough understanding of the formation process of expectations by the general public and of the relationship between expectations and economic choices. This warrants reliable and detailed data on consumers' expectations of macroeconomic variables such as inflation or interest rates. We, thus, survey the available survey data and issues regarding the measurement of macroeconomic expectations. Furthermore, we discuss the research frontier on important aspects of the expectations channel: We evaluate the evidence on whether expectations are formed consistently with standard macroeconomic relationships, discuss the insights with respect to the anchoring of inflation expectations, explore the role of narratives and preferences and lastly, we survey the research on causal effects of central bank communication on expectations and economic choices.

Adapting the Digital Servuction Model to Central Banks: Case Study: European Central Bank

Central bank communication has changed over the years, following the trend of digitalization. It has been used as a tool for the implementation of monetary policies since the 1990s, when central banks started publishing their inflation reports, outlooks, and meeting minutes on the road towards greater transparency, and to help meet their price stability mandate. This mandate cannot be achieved through traditional financial instruments alone, so digital communication and marketing has become an economic policy tool. The effectiveness of the European Central Bank’s online communication tools will be tested via a GAP model, by applying an adapted version of the servuction scale to the Bank and disseminating it to 500 citizens, with the purpose of measuring citizen satisfaction with its website and communications. The servuction model focuses on high quality services that are perceived as such by private sector customers, having a strong marketing component. The originality of the research consists in adapting it to the public sector, more specifically to central banks, and by treating citizens as customers throughout the study. The model was successfully applied to the European Central Bank, demonstrating that citizens’ expectations are highest regarding both the reliability and assurance dimensions, meaning that they want to feel confident in ECB actions, and to the understandability dimension of its online content. The largest gaps between citizens’ expectations and perceptions were identified within the efficiency, understandability, and empathy dimensions. In future, the study can be replicated and adapted to both national central banks and private banks within the European Union, assessing how citizens perceive their websites, communication, and marketing strategies, with the purpose of improving the latter two, and increasing civic engagement. The model can also be adapted to narrower topics relating to sustainable digital development, such as the expectations and perceptions of citizens with regards to central bank digital currencies.

Research on the Measurement of Central Bank Communication Index and its Impact on the Macroeconomy

With the increasing size of financial assets and the complexity of monetary patterns, countries around the world are gradually becoming more transparent in their monetary policies, using central bank monetary policy communication as a new type of monetary policy instrument. To measure central bank communication more accurately, this paper proposes a dynamic topic model, LDA-BP, based on branching processes, to construct the central bank communication index. At the same time, this paper does four things: it uses the constructed communication index as a proxy variable for the new monetary policy instrument; it builds a TVP-FAVAR model that can extract potential macroeconomic information from many variables, and its time-varying nature can better reflect the dynamic regulatory effect of monetary policy; it constructs a three-dimensional impulse response diagram; and it conducts a systematic analysis of macroeconomic impact. The experimental results of demonstrate its effectiveness on central bank monetary policy communication, as it captures timely information about conventional monetary policy instruments and immediately responds to changes in interest rates and money supply. All three monetary policy instruments are effective in smoothing output volatility, with monetary policy communication having a longer-term impact on the macroeconomy.

More than words: Fed Chairs’ communication during congressional testimonies

We study soft information contained in congressional testimonies by the Federal Reserve Chairs and analyze its effects on financial markets. Using machine learning, we construct high-frequency measures of Fed Chair’s and Congress members’ emotions expressed via their words, voice and face. Increases in the Chair’s text-, voice-, or face-emotion indices during the testimony generally raise the S&P500 index and lower the VIX. Stock prices are particularly sensitive to the Fed Chair’s answers to questions directly related to monetary policy. The effects during the testimony add up and propagate after the testimony, reaching magnitudes comparable to those after a policy rate cut. Our findings resonate with the view in psychology that communication is much more than words and underscore the need for a holistic approach to central bank communication.

Can the tone of central bankers’ speeches discourage potential bank borrowers in the Eurozone?

The discouragement of potential bank borrowers is a credit market outcome, where discouraged firms are those who need bank credit but do not apply for it due to fear of rejection. Discouragement may arise from behavioural factors shaping firms’ perceptions of the probability of being rejected. We examine whether central bank communication, captured by the tone of central bankers’ speeches, affects the observed discouragement likelihood. The results document a robust negative relationship between the tone of central bankers’ speeches and borrowers’ discouragement across Eurozone countries. This result remains intact in the presence of a wide set of firm-specific and macroeconomic control variables and robustness tests.