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Shocking language: Understanding the macroeconomic effects of central bank communication

Author

Listed:
  • Hansen, Stephen

    (Universitat Pompeu Fabra and GSE)

  • McMahon, Michael

    (IMF-STI, University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU))

Abstract

We explore how the multi-dimensional aspects of information released by the FOMC has 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.

Suggested Citation

  • Hansen, Stephen & McMahon, Michael, 2015. "Shocking language: Understanding the macroeconomic effects of central bank communication," CAGE Online Working Paper Series 258, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:258
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    More about this item

    Keywords

    Monetary policy; communication; Vector Autoregression. JEL Classification: E52; E58;
    All these keywords.

    JEL classification:

    • 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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