Does it Pay to Watch Central Bankers' Lips? The Information Content of Ecb Wording

Abstract

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0570.pdf In the empirical analysis, we employ a monetary reaction function extended by the wording indicator. Our results indicate that the decoding of rhetoric signals is useful because wording includes information helpful to improve the explanation of interest rate decision based on standard explanatory models. This result is confirmed on the basis of out of sample analysis where the period on which the wording indicator's choice of weights is based is not included in testing this indicator's significance. We conclude that ECB wording has an information content which cannot fully be replicated by Taylor type regressions. But simple decoding of central bankers' messages cannot substitute a more thorough analysis of economic data. Our findings indicate that judgements based solely on analysing central bankers' speeches are inferior to more refined approaches based on models and economic data. Non-Technical Summary Does it Pay to Watch Central Bankers' Lips? The Information Content of ECB WordingFriedrich Heinemann and Katrin Ullrich Centre for European Economic Research (ZEW), Mannheim Revised version September 2005 AbstractIn this analysis, the informational content of central bank rhetoric is assessed based on the experience with the ECB since 1999. Among the ECB's communication channels we focus on the monthly press conferences. Based on a counting of certain signal words 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. The results are confirmed by out of sample analysis where the determination of the wording indicators' weights is based on the early ECB period which, subsequently, is excluded from the tests. Our conclusion is that linguistic analysis can improve but not substitute more rigorous forecasting techniques based on hard economic data.

Loud and Clear? Can We Hear When the Sarb Speaks?

“…Some researchers, e.g. Heinmann and Ullrich (2005), have created an “objective index,” which measures the frequency of coding words, while avoiding the use of judgement in the construction of the index. Other researchers –Rosa and Verga (2007) and Erhmann and Fratzscher (2005) – have created indices that entail some judgement or interpretation in codifying the communication of the central bank.…”

The Impact of ECB Monetary Policy Decisions and Communication on the Yield Curve

“…Other studies have used information from EURIBOR futures (see Bernoth and von Hagen, 2004;Wilhelmsen and Zaghini, 2005) By using market interest rates we also circumvent the inherent shortcomings of subjective indicators of the tone in ECB communication that have been constructed using a context based analysis of ECB statements. Several authors have constructed such subjective indicators based on counting code words in the ECB introductory statement or the Monthly Bulletin editorial ((see Heinemann and Ullrich, 2005), Rosa and Verga (2005) Gies (2005); Meyer (2004) and Gerlach (2004)). Using the indicator developed in Gies (2005), both Gies (2005) and Sebestyén and Sicilia (2005) find that the tone of ECB communication has an impact on both short and longterm interest rates in the euro area.…”

Investigating the monetary policy of central banks with assessment indicators

“…One distinctive feature of its strategy was the targeting of growth in monetary aggregates. However, this notion has been challenged by Clarida, Gali, and Gertler (1998) as well as Bernanke and Mihov (1997) who nd monetary aggregates to be statistically insigni cant when estimating Taylor Heinemann and Ullrich (2007), (iii) the aggregate index of Berger, de Haan, and Sturm (2006), and (iv) the indicator of Ullrich (2008).…”

“…Heinemann and Ullrich (2007) analyse the information content of ECB statements during monthly press conferences and show that including an indicator for signal words can improve a model's t when added to standard explanatory variables in a Taylor rule. Berger, de Haan, and Sturm (2006) analyse the role of money in the ECB monetary policy using qualitative information from the introductory statements of the ECB monthly press conferences.…”