Central Bank Mandates and Monetary Policy Stances: through the Lens of Federal Reserve Speeches

86 Pages Posted: 31 Oct 2022 Last revised: 27 Mar 2024

See all articles by Christoph Bertsch

Christoph Bertsch

Sveriges Riksbank - Research Division

Isaiah Hull

BI Norwegian Business School

Robin L. Lumsdaine

American University - Department of Finance and Real Estate; Erasmus University Rotterdam (EUR) - Department of Econometrics; National Bureau of Economic Research (NBER); Tinbergen Institute

Xin Zhang

Sveriges Riksbank - Research Division

Date Written: March 25, 2024

Abstract

The Federal Reserve System has an institutional mandate to pursue price stability and maximum sustainable employment; however, it remains unclear whether it can also pursue secondary objectives. The academic literature has largely argued that it should not. We characterize the Fed’s interpretation of its mandate using state-of-the-art methods from natural language processing, including a collection of large language models (LLMs) that we modify for enhanced performance on central bank texts. We apply these methods and models to a comprehensive corpus of Fed speeches delivered between 1960 and 2022. We find that the Fed perceives financial stability to be the most important policy concern that is not directly enumerated in its mandate, especially in times when the debt-to-GDP ratio is high, but does not generally treat it as a separate policy objective. In its policy discourse, it has frequently discussed the use of monetary policy to achieve financial stability, which we demonstrate generates movements in asset prices, even after rigorously controlling for macroeconomic and financial variables.

Keywords: Large Language Models, Machine Learning, Central Bank Communication, Financial Stability

JEL Classification: C55, E42, E5, E61, G28

Suggested Citation

Bertsch, Christoph and Hull, Isaiah and Lumsdaine, Robin L. and Zhang, Xin, Central Bank Mandates and Monetary Policy Stances: through the Lens of Federal Reserve Speeches (March 25, 2024). Available at SSRN: https://ssrn.com/abstract=4255978 or http://dx.doi.org/10.2139/ssrn.4255978

Christoph Bertsch

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Isaiah Hull

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Robin L. Lumsdaine (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Xin Zhang

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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