Central Bank sentiment and policy expectations

Fabien Labondance (1) , Paul Hubert (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

We explore empirically the theoretical prediction that optimism or pessimism have aggregate effects, in the context of monetary policy. First, we quantify the tone conveyed by FOMC policymakers in their statements using computational linguistics. Second, we identify sentiment as the unpredictable component of tone, orthogonal to fundamentals, expectations, monetary shocks and investors’ sentiment. Third, we estimate the impact of FOMC sentiment on the term structure of private interest rate expectations using a high-frequency methodology and an ARCH model. Optimistic FOMC sentiment increases policy expectations primarily at the one-year maturity. We also find that sentiment affects inflation and industrial production beyond monetary shocks.

Mots clés: Animal spirits; Optimism; Confidence; FOMC; Interest rate expectations; Central Bank Communication; Eurpean Central Bank; Aggregate Effects

Domaines: Economies et finances

Fabien Labondance, Paul Hubert. Central Bank sentiment and policy expectations. 2017. ⟨hal-03457514⟩