Assessing the credibility of central bank signals: The case of transitory inflation

John Baker and Jean-Paul Lam

Economics Letters, 2022, vol. 220, issue C

Abstract: We present a novel text-based measure on the credibility of the now infamous signal from the Federal Reserve regarding transitory inflation in 2021. Specifically, we construct a daily sentiment index from an extensive set of news articles. The measure illustrates a declining sentiment of trust in the signal as U.S. inflation persisted and accelerated through 2021. Daily VAR estimates show that credibility diminishes significantly following positive inflation surprises and that negative credibility shocks boost inflation expectations over the short and long-run.

Keywords: Inflation; Transitory inflation; Central bank signal; Central bank communications; Inflation expectations (search for similar items in EconPapers)
JEL-codes: E30 E31 E61 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:220:y:2022:i:c:s0165176522003494

DOI: 10.1016/j.econlet.2022.110875

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