The financial market impact of ECB monetary policy press conferences - a text based approach

Conor Parle

No 4/RT/21, Research Technical Papers from Central Bank of Ireland

Abstract: Using methods from natural language processing I create two measures of the monetary policy tilt of the ECB entitled the “Hawk-Dove Indices”, that outline the beliefs of the ECB on the current state of the economy and the outlook for growth and inflation. These measures closely track interest rate expectations over the tightening and loosening cycle, and can provide a useful measure of monetary policy tilt at zero lower bound episodes and contains information about the state of the economy. I exploit the time lag between decision announcements and the ECB’s monetary policy press conference to assess the immediate financial market impact of changes in communication within the press conference, free from the effects of the shock from the monetary policy decision. Consistent with the literature on the information channel of monetary policy, I find a non-negligible positive (negative) effect on stock prices of a more hawkish (dovish) tone in the press conference, indicating that the ECB reveals “private information” during these press conferences, and that market participants internalise this as good (bad) news regarding the future state of the economy, rather than internalising a future potential increase (decrease) in interest rates. This effect is stronger prior to the introduction of formal forward guidance, suggesting that since then ECB communication has been less surprising to markets in recent times.

Keywords: Monetary policy; communication; machine learning; natural language processing; event study; information effects (search for similar items in EconPapers)
JEL-codes: C55 E52 E58 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-big, nep-cba, nep-cmp, nep-eec, nep-isf, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Journal Article: The financial market impact of ECB monetary policy press conferences — A text based approach (2022)
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