Sentiment in Central Banks' Financial Stability Reports

52 Pages Posted: 26 Mar 2017

See all articles by Ricardo Correa

Ricardo Correa

Board of Governors of the Federal Reserve System

Keshav Garud

Board of Governors of the Federal Reserve System

Juan M. Londono

Federal Reserve Board of Governors

Nathan Mislang

Board of Governors of the Federal Reserve System

Date Written: 2017-03-21

Abstract

Using the text of financial stability reports (FSRs) published by central banks, we analyze the relation between the financial cycle and the sentiment conveyed in these official communications. To do so, we construct a dictionary tailored specifically to a financial stability context, which assigns positive and negative connotations based on the sentiment conveyed by words in FSRs. With this dictionary, we construct a financial stability sentiment (FSS) index. Using a panel of 35 countries for the sample period between 2005 and 2015, we find that central banks' FSS indexes are mostly driven by developments in the banking sector and by the indicators that convey information about the health of this sector. We also find that the sentiment captured by the FSS index translates into changes in financial cycle indicators related to credit, asset prices, and systemic risk. Finally, our results show that central banks' sentiment deteriorates just prior to the start of banking crises.

Keywords: Financial stability, Central bank communications, Text analysis, Dictionary, Sentiment index

JEL Classification: G15, G28

Suggested Citation

Correa, Ricardo and Garud, Keshav and Londono-Yarce, Juan-Miguel and Mislang, Nathan, Sentiment in Central Banks' Financial Stability Reports (2017-03-21). FRB International Finance Discussion Paper No. 1203. Available at SSRN: https://ssrn.com/abstract=2940140 or http://dx.doi.org/10.17016/IFDP.2017.1203

Ricardo Correa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Keshav Garud

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Juan-Miguel Londono-Yarce (Contact Author)

Federal Reserve Board of Governors ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Nathan Mislang

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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