Category Archives: central bank communication

Forthcoming in Journal of Econometrics:  Central Bank Mandates and Monetary Policy Stances  

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“Central Bank Mandates and Monetary Policy Stances: through the Lens of Federal Reserve Speeches” with Isaiah Hull, Robin Lumsdaine, and Xin Zhang, Journal of Econometrics, forthcoming.

  • Abstract: The Federal Reserve System has an institutional mandate to pursue price stability and maximum sustainable employment; however, it remains unclear whether it can also pursue secondary objectives. The academic literature has largely argued that it should not. We characterize the Fed’s interpretation of its mandate using state-of-the-art methods from natural language processing, including a collection of large language models (LLMs) that we modify for enhanced performance on central bank texts. We apply these methods and models to a comprehensive corpus of Fed speeches delivered between 1960 and 2022. We find that the Fed perceives financial stability to be the most important policy concern that is not directly enumerated in its mandate, especially in times when the debt-to-GDP ratio is high, but does not generally treat it as a separate policy objective. In its policy discourse, it has frequently discussed the use of monetary policy to achieve financial stability, which we demonstrate generates movements in asset prices, even after rigorously controlling for macroeconomic and financial variables. (C55, E42, E5, E61, G28)
A word cloud of terms and groups of terms that were identified by extractive question answering as the speaker’s main concern in Federal Reserve speech paragraphs with low dual mandate content scores over the period 1984-2022.

Keywords: Large Language Models, Machine Learning, Central Bank Communication, Financial Stability. An earlier version is available as Riksbank Working Paper No. 417

Riksbank WP No. 432 on International Central Bank Communication

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“Four Facts about International Central Bank Communication”

  • Abstract: This paper introduces a novel database of text features extracted from the speeches of 53 central banks from 1996 to 2023 using state-of-the-art NLP methods. We establish four facts: (1) central banks with floating and pegged exchange rates communicate differently, and these differences are particularly pronounced in discussions about exchange rates and the dollar, (2) communication spillovers from the Federal Reserve are prominent in exchange rate and dollar-related topics for dollar peggers and in hawkish sentiment for others, (3) central banks engage in FX intervention guidance, and (4) more transparent institutions are less responsive to political pressure in their communication. (C55, E42, E5, F31, F42)
The figure visualizes the output of the t-stochastic nearest neighbors (t-SNE) algorithm applied to the exchange rate, U.S. dollar and international trade text features (see Section 2.1) for 21 central banks. We construct three categories for the visualization: “base” currencies in blue (U.S. dollar/Federal Reserve System, Euro/ECB), floating currencies in orange, and pegged currencies in green, which includes the euro NCBs.
  • Keywords: Exchange Rates, Natural Language Processing (NLP), International Spillovers, Monetary Policy.

SUERF Policy Brief No. 528 on Fed Speeches Meet Transformer Models

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This short policy article discusses the use of state-of-the-art methods from natural language processing to examine the evolution of the Fed’s interpretation of its mandate over time, using the largest corpus of Fed speeches assembled to-date: https://www.suerf.org/suer-policy-brief/61859/federal-reserve-speeches-meet-transformer-models

It is based on our recently published working paper: Bertsch, Christoph, Hull, Isaiah, Lumsdaine, Robin L. and Xin Zhang (2022). “Central Bank Mandates and Monetary Policy Stances: through the Lens of Federal Reserve Speeches,” Sveriges Riksbank Working Paper Series No. 417, 2022: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4255978.

Riksbank WP No. 417 on Central Bank Mandates

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Central Bank Mandates and Monetary Policy Stances: through the Lens of Federal Reserve Speeches” with Isaiah Hull, Robin Lumsdaine and Xin Zhang

  • Abstract: When does the Federal Reserve deviate from its dual mandate of pursuing the economic goals of maximum employment and price stability and what are the consequences? We assemble the most comprehensive collection of Federal Reserve speeches to-date and apply state-of- the-art natural language processing methods to extract a variety of textual features from each paragraph of each speech. We find that the periodic emergence of non-dual mandate related discussions is an important determinant of time-variations in the historical conduct of monetary policy with implications for asset returns. The period from mid-1996 to late-2010 stands out as the time with the narrowest focus on balancing the dual mandate. Prior to the 1980s there was a outsized attention to employment and output growth considerations, while non dual-mandate discussions centered around financial stability considerations emerged after the Great Financial Crisis. Forward-looking financial stability concerns are a particularly important driver of a less accommodative monetary policy stance when Fed officials link these concerns to monetary policy, rather than changes in banking regulation. Conversely, discussions about current financial crises and monetary policy in the context of inflation-employment themes are associated with a more accommodative policy stance. (C63, D84, E32, E7)
The figure above shows a word cloud of concerning terms that appear in statements with low dual mandate content scores during the period 1984-2017. Such statements are identifed using extractive question answering with the RoBERTa model.
  • Keywords: Natural Language Processing, Machine Learning, Central Bank Communication, Financial Stability, Zero Shot Classification, Extractive Question Answering, Semantic Textual Similarity.

Forthcoming in the Journal of International Money and Finance: “Spread the Word: International Spillovers from Central Bank Communication”

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“Spread the Word: International Spillovers from Central Bank Communication” with Hanna Armelius, Isaiah Hull and Xin Zhang, Journal of International Money and Finance, Volume 103, Pages 1-32, May 2020. – Lead article –

    • Abstract: We construct a novel text dataset to measure the sentiment component of communications for 23 central banks over the 2002-2017 period. Our analysis yields three results. First, comovement in sentiment across central banks is not reducible to trade or financial flow exposures. Second, sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables; and the Fed appears to be a uniquely influential generator of such spillovers, even among prominent central banks. And third, geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties have weaker predictive power. (JEL E52, E58, F42)

The figure show the normalized rolling net sentiment scores associated with ECB speeches. Sentiment scores are computed using a dictionary-based approach documented in Loughran and McDonald (2011).