Shocking Language: Understanding the Macroeconomic Effects of Central Bank Communication

42 Pages Posted: 19 Jan 2016

See all articles by Stephen Hansen

Stephen Hansen

University of Oxford - Department of Economics

Michael F. McMahon

University of Warwick - Faculty of Social Studies; London School of Economics & Political Science (LSE)

Date Written: December 16, 2015

Abstract

We explore how the multi-dimensional aspects of information released by the FOMC have effects on both market and real economic variables. Using tools from computational linguistics, we measure the information released by the FOMC on the state of economic conditions, as well as the guidance the FOMC provides about future monetary policy decisions. Employing these measures within a FAVAR framework, we find that shocks to forward guidance are more important than the FOMC communication of current economic conditions in terms of their effects on market and real variables. Nonetheless, neither communication has particularly strong effects on real economic variables.

Keywords: Monetary policy, communication, Vector Autoregression

JEL Classification: E52, E58

Suggested Citation

Hansen, Stephen and McMahon, Michael F., Shocking Language: Understanding the Macroeconomic Effects of Central Bank Communication (December 16, 2015). CAMA Working Paper 4/2016, Available at SSRN: https://ssrn.com/abstract=2717790 or http://dx.doi.org/10.2139/ssrn.2717790

Stephen Hansen

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, Oxfordshire OX1 3UQ
United Kingdom

Michael F. McMahon (Contact Author)

University of Warwick - Faculty of Social Studies ( email )

United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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