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Central Bank sentiment and policy expectations

Abstract : 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.
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Preprints, Working Papers, ...
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Submitted on : Tuesday, November 30, 2021 - 4:17:07 PM
Last modification on : Friday, March 25, 2022 - 3:58:35 AM


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



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