Monetary Policy, Twitter and Financial Markets: Evidence from Social Media Traffic

38 Pages Posted: 12 Apr 2021

See all articles by Donato Masciandaro

Donato Masciandaro

Bocconi University - Department of Economics

Davide Romelli

Trinity College (Dublin) - Department of Economics; Trinity College (Dublin)

Gaia Rubera

Bocconi University

Date Written: April 7, 2021

Abstract

How does central bank communication affect financial markets? This paper shows that the monetary policy announcements of three major central banks, i.e. the European Central Bank, the Federal Reserve and the Bank of England, trigger significant discussions on monetary policy on Twitter. Using machine learning techniques we identify Twitter messages related to monetary policy around the release of monetary policy decisions and we build a metric of the similarity between the policy announcement and Twitter traffic before and after the announcement. We interpret large changes in the similarity of tweets and announcements as a proxy for monetary policy surprise and show that market volatility spikes after the announcement whenever changes in similarity are high. These findings suggest that social media discussions on central bank communication are aligned with bond and stock market reactions.

Keywords: monetary policy, central bank communication, financial markets, social media, Twitter, Federal Reserve, European Central Bank, Bank of England

JEL Classification: E44, E52, E58, G14, G15, G41

Suggested Citation

Masciandaro, Donato and Romelli, Davide and Rubera, Gaia, Monetary Policy, Twitter and Financial Markets: Evidence from Social Media Traffic (April 7, 2021). BAFFI CAREFIN Centre Research Paper No. 2021-160, Available at SSRN: https://ssrn.com/abstract=3823185 or http://dx.doi.org/10.2139/ssrn.3823185

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Davide Romelli

Trinity College (Dublin) - Department of Economics ( email )

Arts Building
Room 3014
Dublin
Ireland

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster D2
Ireland

Gaia Rubera

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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