Shocking Language: Understanding the Macroeconomic Effects of Central Bank Communication

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. JEL Codes: E52, E58 * We have benefited from comments during the ISOM conference in Zurich, and seminars at the National University of Singapore and the IMF. We would like to especially thank Martin Bodenstein, James Cloyne, Carlo Favero, Paul Hubert, Oscar Jorda, Christian Julliard, Dimitris Korobilis, Francesca Monti, Helene Rey and Francisco Ruge-Murcia for insightful comments, suggestions and discussions. Paul Soto and Marcel Schlepper provided excellent research assistance. Part of this work was completed when both authors were Houblon-Norman Fellows at the Bank of England. Michael is currently based at the IMF-STI. The views expressed in this paper are those of the authors and do not necessarily represent those of anyone at the Bank of England, the IMF or IMF policy. We also benefited from a British Academy small grant. Any errors remain ours alone.

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