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A Forward Guidance Indicator For The South African Reserve Bank: Implementing A Text Analysis Algorithm

Ruan Erasmus () and Hylton Hollander ()
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Ruan Erasmus: Department of Economics, Stellenbosch University

No 04/2020, Working Papers from Stellenbosch University, Department of Economics

Abstract: The expansion of central bank communications and the increased use thereof as a policy tool to manage expectations have led to an area of research, semantic modelling, that analyses the words and phrases used by central banks. We use text-mining and text-analysis techniques on South African Reserve Bank monetary policy committee statements to construct an index measuring the stance of monetary policy: a forward guidance indicator (FGI). We show that, after controlling for market expectations, FGIs provide significant predictive power for future changes in the repurchase interest rate (the primary monetary policy instrument). Furthermore, we show that FGIs are primarily driven by inflation expectations, which highlights the strong link between the SARB's communication strategy and its inflation targeting mandate. In fact, we observe a systematic anti-inflation bias in the communicated stance of monetary policy---both absolutely and asymmetrically. The results are, however, sensitive to the selection of the dictionary used to analyse the text.

Keywords: Monetary policy; Text analysis; Forward guidance; Inflation targeting (search for similar items in EconPapers)
JEL-codes: C43 C53 E42 E47 E52 E58 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-big, nep-cba, nep-mac and nep-mon
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