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The signaling effects of central bank tone

Paul Hubert and Fabien Labondance ()

European Economic Review, 2021, vol. 133, issue C

Abstract: Does policymakers’ choice of words matter? We assess empirically whether the tone of FOMC statements contains useful information for financial market participants and explore the nature of the information conveyed. We quantify central bank tone using computational linguistics. We find that the tone of FOMC statements explains monetary surprises beyond FOMC information released on policy announcement days such as policymakers’ forecasts and votes. We also find that the FOMC tone matters more around monetary cycle turning points. We show that the tone of policy statements also helps predict future policy decisions. Our findings suggest that the central bank tone may be one of the vehicles allowing for some information transfer to the public.

Keywords: Sentiment; FOMC; Dissent; Interest rate expectations; ECB (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.euroecorev.2021.103684

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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