Financial stability and the Fed: Evidence from congressional hearings

Abstract

This article retraces how financial stability considerations interacted with US monetary policy before and during the Great Recession. Using text-mining techniques, this article innovates by constructing indicators for financial stability sentiment expressed during testimonies of five Federal Reserve Chairs.Including these text-based measures adds explanatory power to Taylor-rule models. Negative financial stability sentiment coincided with a more accommodative monetary policy stance than implied by standard Taylor-rule factors, even during the decades before the Great Recession. These findings are consistent with a preference for monetary policy reacting to financial instability rather than acting pre-emptively to a perceived build-up of risks.

When all speak, should we listen? A cross‐country analysis of disagreement in policymaking and its implications

“…Several scholars have shown how the information content contained in the public communiqué of central banks across the globe can influence the macroeconomic and financial stability of a country (Ehrmann et al, 2022; Kliesen et al, 2019; among others). Text‐based measures have been used in the literature to understand the nuances of the relationship between financial stability and monetary policy (Dybowski & Kempa, 2020; Wischnewsky et al, 2021). Friedrich et al (2019) look at the monetary policy statements of several central banks to construct a financial stability orientation index.…”