Reading between the lines: Uncovering asymmetry in the central bank loss function

Markus Haavio, Joni Heikkinen, Pirkka Jalasjoki, Juha Kilponen, Maritta Paloviita and Ilona Vänni

No 6/2024, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We depart from the common reaction function-based approach used to infer central bank preferences. Instead, we extract the tone from the textual information in the central bank communication using both a lexicon-based approach and a language model. We combine the tone with real-time information available to the monetary policy decision-maker and directly estimate the loss function. We find strong and robust evidence of asymmetry in the case of the European Central Bank during 1999-2021: the slope of the loss function was roughly three times steeper when inflation exceeded the target compared to when it was below the target. This represents a significant departure from the quadratic and symmetric monetary policy loss function typically applied in macro models.

Keywords: central bank communication; textual analysis; language models; asymmetric loss function; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-big, nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:298852

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