The Financial Instability – Monetary Policy Nexus: Evidence from the FOMC Minutes

Dimitrios Kanelis, Lars H. Kranzmann and Pierre L. Siklos

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We analyze how financial stability concerns discussed during Federal Open Market Committee (FOMC) meetings influence the Federal Reserve’s monetary policy implementation and communication. Utilizing large language models (LLMs) to analyze FOMC minutes from 1993 to 2022, we measure both mandate-related and financial stability-related sentiment within a unified framework, enabling a nuanced examination of potential links between these two objectives. Our results indicate an increase in financial stability concerns following the Great Financial Crisis, particularly during periods of monetary tightening and the COVID-19 pandemic. Outside the zero lower bound (ZLB), heightened financial stability concerns are associated with a reduction in the federal funds rate, while within the ZLB, they correlate with a tightening of unconventional measures. Methodologically, we introduce a novel labeled dataset that supports a contextualized LLM interpretation of FOMC documents and apply explainable AI techniques to elucidate the model’s reasoning.

Keywords: explainable artificial intelligence; financial stability; FOMC deliberations; monetary policy communication; natural language processing (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2025-04
New Economics Papers: this item is included in nep-big, nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-25

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