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The role of central bank communication in inflation-targeting Eastern European emerging economies

Author

Listed:
  • Valerio Astuti

    (Banca d'Italia)

  • Alessio Ciarlone

    (Banca d'Italia)

  • Alberto Coco

    (Banca d'Italia)

Abstract

In this paper, we analyze whether central bank communication can be an additional tool to provide guidance on monetary policy, drive private agents’ inflation expectations and financial asset prices in the main countries of Central and Eastern Europe. By applying natural language processing techniques to monetary policy statements and minutes, we first derive a series of salient topics on which central bank communications focused over the last two decades, and then develop indices of tone to gauge their respective degrees of hawkishness (dovishness) about the economic outlook. By using these indices in an econometric set-up, we find that a more hawkish (dovish) tone – reflecting a more positive (negative) assessment of the economic outlook – anticipates a more restrictive (accommodative) monetary policy decision, raises (lowers) short-term inflation expectations of private sector agents, increases (reduces) market interest rates across different maturities, and drives share prices down (up). Overall, our analysis suggests that communication may be a complementary and effective monetary policy tool available to central banks in emerging economies.

Suggested Citation

  • Valerio Astuti & Alessio Ciarlone & Alberto Coco, 2022. "The role of central bank communication in inflation-targeting Eastern European emerging economies," Temi di discussione (Economic working papers) 1381, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1381_22
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    More about this item

    Keywords

    central banks; communication; natural language processing; Taylor rule; inflation expectations; financial markets; CEE-3;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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