Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements

54 Pages Posted: 10 Sep 2009 Last revised: 1 Oct 2009

See all articles by David O. Lucca

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York

Francesco Trebbi

Vancouver School of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 8, 2009

Abstract

We present a new automated, objective and intuitive scoring technique to measure the content of central bank communication about future interest rate decisions based on information from the Internet and news sources. We apply the methodology to statements released by the Federal Open Market Committee (FOMC) after its policy meetings starting in 1999. Using intra-day financial quotes, we find that short-term nominal Treasury yields respond to changes in policy rates around policy announcements, whereas longer-dated Treasuries mainly react to changes in policy communication. Using lower frequency data, we find that changes in the content of the statements lead policy rate decisions by more than a year in univariate interest rate forecasting and vector autoregression (VAR) models. When we estimate Treasury yield responses to the shocks identified in the VAR, we find communication to be a more important determinant of Treasury rates than contemporaneous policy rate decisions. These results are consistent with the view that the FOMC releases information about future policy rate actions in its statements and that market participants incorporate this information when pricing longer-dated Treasuries. Finally, we decompose realized policy rate decisions using a forward-looking Taylor rule model. Based on this decomposition, we find that FOMC statements contain significant information regarding both the predicted rule-based interest rate and the Taylor-rule residual component, and that content of the statements leads the residual by a few quarters.

Keywords: Monetary Policy, Central Bank Communication, FOMC, Computational Linguistics

JEL Classification: E43, E52, E58

Suggested Citation

Lucca, David O. and Trebbi, Francesco, Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements (September 8, 2009). Chicago Booth Research Paper No. 09-34. Available at SSRN: https://ssrn.com/abstract=1470443 or http://dx.doi.org/10.2139/ssrn.1470443

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Francesco Trebbi (Contact Author)

Vancouver School of Economics ( email )

University of British Columbia
6000 Iona Dr.
Vancouver Canada, BC V6T 1L4
Canada

HOME PAGE: http://faculty.arts.ubc.ca/ftrebbi/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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