Reading Between the Lines: Objective Function Estimation using RBA Communications

Robert Gao
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Robert Gao: Monash University

Warwick-Monash Economics Student Papers from Warwick Monash Economics Student Papers

Abstract: We use a dictionary based natural language processing approach to quantify the sentiment of RBA communications. This measure of sentiment is then used as a proxy for loss in the estimation of the RBA’s objective function. We find that RBA communications imply a target for average inflation between 2.4% to 2.7% for short run horizons of up to one year ahead, consistent with the RBA’s medium term inflation target band of 2-3%. This result is robust to different forms of communication, forecast horizons, and allowing for asymmetric preferences. We also find that the RBA’s loss improves with rising output growth, commodity prices and stock market returns, as well as an appreciating exchange rate and falling unemployment.

Keywords: central bank; natural language processing; objective function; Reserve Bank of Australia; text analysis JEL Classification: E58; E5 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-big, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:wrkesp:21

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