Central Bank Sentiment and Policy Expectations

53 Pages Posted: 20 Feb 2017

See all articles by Paul Hubert

Paul Hubert

OFCE - Sciences Po

Labondance Fabien

Louvain School of Management (UCL); University of Grenoble

Date Written: February 17, 2017


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

JEL Classification: E43, E52, E58

Suggested Citation

Hubert, Paul and Fabien, Labondance, Central Bank Sentiment and Policy Expectations (February 17, 2017). Bank of England Working Paper No. 648. Available at SSRN: https://ssrn.com/abstract=2920496 or http://dx.doi.org/10.2139/ssrn.2920496

Paul Hubert (Contact Author)

OFCE - Sciences Po ( email )

10 place de Catalogne
Paris 75014

Labondance Fabien

Louvain School of Management (UCL) ( email )


University of Grenoble ( email )


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