Does it Pay to Watch Central Bankers’ Lips? The Information Content of ECB Wording
Schweizerische Zeitschrift für Volkswirtschaft und Statistik / Revue Suisse d'Economie politique et de Statistique / Swiss Journal of Economics and Statistics, Volume 143, Issue 2, 2007, Pages 155-185
Keywords
Taylor rule, wording, central bank communication
Abstract
In this analysis, the informational content of central bank rhetoric is assessed based on the experience with the ECB since 1999. We construct a wording indicator reflecting the "hawkishness" of monetary rhetorics. For the construction, we develop an objective algorithm representing a learning process of ECB observers. We then integrate this indicator into a standard Taylor-type ordered probit model for the explanation of the interest rate. We show that the wording indicator can improve the model’s fit when added to the standard explanatory variables. However, a model based solely on this indicator performs worse than the baseline.