Central bank tone and the dispersion of views within monetary policy committees

Paul Hubert (1) , Fabien Labondance (1, 2)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190)

Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1-year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we showthatcentral banktonehelps predicting future policy decisions.

Mots clés: Animal spirits; Optimism; Confidence; FOMC; Central bank communication; Interest rate expectations; ECB; Aggregate effects

Domaines: Economies et finances

Paul Hubert, Fabien Labondance. Central bank tone and the dispersion of views within monetary policy committees. 2019. ⟨hal-03403256⟩