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The role of central bank communication in inflation-targeting Eastern European emerging economies

Valerio Astuti (), Alessio Ciarlone () and Alberto Coco ()
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Valerio Astuti: Banca d'Italia
Alberto Coco: Banca d'Italia

No 1381, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In this paper, we analyze whether central bank communication can be an additional tool to provide guidance on monetary policy, drive private agents’ inflation expectations and financial asset prices in the main countries of Central and Eastern Europe. By applying natural language processing techniques to monetary policy statements and minutes, we first derive a series of salient topics on which central bank communications focused over the last two decades, and then develop indices of tone to gauge their respective degrees of hawkishness (dovishness) about the economic outlook. By using these indices in an econometric set-up, we find that a more hawkish (dovish) tone – reflecting a more positive (negative) assessment of the economic outlook – anticipates a more restrictive (accommodative) monetary policy decision, raises (lowers) short-term inflation expectations of private sector agents, increases (reduces) market interest rates across different maturities, and drives share prices down (up). Overall, our analysis suggests that communication may be a complementary and effective monetary policy tool available to central banks in emerging economies.

Keywords: central banks; communication; natural language processing; Taylor rule; inflation expectations; financial markets; CEE-3 (search for similar items in EconPapers)
JEL-codes: C22 C25 C45 E44 E52 E58 (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-big, nep-eec, nep-mon and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1381_22

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