Sentiment in Central Bank's Financial Stability Reports

Abstract

Using the text of financial stability reports (FSRs) published by central banks, we analyze the relation between the financial cycle and the sentiment conveyed in these official communications. To do so, we construct a dictionary tailored specifically to a financial stability context, which assigns positive and negative connotations based on the sentiment conveyed by words in FSRs. With this dictionary, we construct a financial stability sentiment (FSS) index. Using a panel of 35 countries for the sample period between 2005 and 2015, we find that central banks' FSS indexes are mostly driven by developments in the banking sector and by the indicators that convey information about the health of this sector. We also find that the sentiment captured by the FSS index translates into changes in financial cycle indicators related to credit, asset prices, and systemic risk. Finally, our results show that central banks' sentiment deteriorates just prior to the start of banking crises. JEL Classification: G15, G28.

Financial Stability Reports in Latin America and the Caribbean

“…They find that FSRs, especially when containing optimistic assessments, have a significantly positive impact on stock prices, highlighting the importance of FSRs as communication tools. Correa et al (2017) construct a financial stability index based on positive and negative connotations of wording used in FSRs. They find that the sentiment captured in this index deteriorates just before the beginning of banking crises.…”