Talking About Policy: The Influence of Communicational Dispersion on Monetary Policy Transmission

Abstract

Clear and effective central bank communication is crucial for shaping market expectations and ensuring efficient monetary policy transmission. This paper investigates the impact of communication dispersion—defined as differences in the monetary policy stances expressed in individual ECB board members’ speeches—on the transmission of monetary policy surprises to bond yields. Using a novel communication dispersion index derived from text analysis of ECB speeches, I examine how dispersed inter-meeting communication influences the effects of both conventional and unconventional monetary policy shocks.Drawing on a comprehensive dataset of nearly 1,800 ECB speeches from 2004 to 2020, the analysis reveals that communication dispersion plays a significant role in the transmission mechanism. High dispersion amplifies the impact of conventional monetary policy shocks, while alignment enhances the effectiveness of unconventional policies like forward guidance and quantitative easing post-2013. The results also shed light on the observed weakening of monetary policy transmission during recessions, suggesting that this effect is primarily associated with periods of low communication dispersion.

Keywords: Monetary Policy, Central Bank Communication, Text Analysis, State Dependency