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Central bank sentiment and policy expectations

Paul Hubert () and Fabien Labondance ()

No 648, Bank of England working papers from Bank of England

Abstract: We explore empirically the theoretical prediction that optimism or pessimism have aggregate effects, in the context of monetary policy. First, we quantify the tone conveyed by FOMC policymakers in their statements using computational linguistics. Second, we identify sentiment as the unpredictable component of tone, orthogonal to fundamentals, expectations, monetary shocks and investors’ sentiment. Third, we estimate the impact of FOMC sentiment on the term structure of private interest rate expectations using a high-frequency methodology and an ARCH model. Optimistic FOMC sentiment increases policy expectations primarily at the one-year maturity. We also find that sentiment affects inflation and industrial production beyond monetary shocks.

Keywords: Animal spirits; optimism; confidence; FOMC; interest rate expectations; central bank communication; ECB; aggregate effects (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2017-02-17
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Related works:
Working Paper: Central Bank sentiment and policy expectations (2017) Downloads
Working Paper: Central Bank Sentiment and Policy Expectations (2016) Downloads
Working Paper: Central Bank sentiment and policy expectations (2016) Downloads
Working Paper: Central Bank Sentiment and Policy Expectations (2016) Downloads
Working Paper: Central Bank Sentiment and Policy Expectations (2016) Downloads
Working Paper: Central Bank Sentiment and Policy Expectations (2016) Downloads
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