The Long-Run Information Effect of Central Bank Communication

73 Pages Posted: 13 Jan 2020

See all articles by Stephen Hansen

Stephen Hansen

Imperial College Business School

Michael McMahon

University of Oxford

Matthew Tong

Bank of England

Date Written: January, 2020

Abstract

Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England’s Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.

Keywords: communication, machine learning, monetary policy

JEL Classification: E52, E58, C55

Suggested Citation

Hansen, Stephen and McMahon, Michael and Tong, Matthew, The Long-Run Information Effect of Central Bank Communication (January, 2020). ECB Working Paper No. 2363, Available at SSRN: https://ssrn.com/abstract=3518449

Stephen Hansen (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Michael McMahon

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Matthew Tong

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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