Central Bank Sentiment and Policy Expectations

Paul Hubert (1) , Fabien Labondance (1)

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

We explore empirically the theoretical prediction that waves of optimism or pessimism may have aggregate effects, in the context of monetary policy. We investigate whether the sentiment conveyed by ECB and FOMC policymakers in their statements affect the term structure of private short-term interest rate expectations. First, we quantify central bank tone using a computational linguistics approach. Second, we identify sentiment as exogenous shocks to these quantitative measures using an augmented narrative approach following the information friction literature. Third, we estimate the impact of sentiment on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model. We find that sentiment shocks increase private interest rate expectations around maturities of one and two years. We also find that this effect is non-linear and depends on the state of the economy and on the characteristics (precision, sign and size) of the sentiment signal.

Mots clés: Animal spirits; Optimism; Confidence; Central bank communication; Interest rate expectations; Animal spirits

Domaines: Economies et finances

Paul Hubert, Fabien Labondance. Central Bank Sentiment and Policy Expectations. 2016. ⟨hal-03459227⟩