Sentiment in Central Banks' Financial Stability Reports

50 Pages Posted: 28 Dec 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: December 21, 2017

Abstract

We use the text of financial stability reports (FSRs) published by central banks to 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 classifies words into positive and negative based on the sentiment conveyed by these words in FSRs. With this dictionary, we construct financial stability sentiment (FSS) indexes for 35 countries between 2005 and 2015. We find that central banks' financial stability communications are mostly driven by developments in the banking sector. Moreover, the sentiment captured by the FSS index explains future movements in financial cycle indicators related to credit, asset prices, and systemic risk. Finally, our results show that the sentiment in central banks' communications 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 (December 21, 2017). Available at SSRN: https://ssrn.com/abstract=3091943 or http://dx.doi.org/10.2139/ssrn.3091943

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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