The Long-Run Information Effect of Central Bank Communication

66 Pages Posted: 28 Jan 2019

See all articles by Stephen Hansen

Stephen Hansen

University of Oxford - Department of Economics

Michael McMahon

University of Oxford

Matthew Tong

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: January 25, 2019

Abstract

Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England’s Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.

Keywords: Monetary policy, communication, machine learning.

JEL Classification: E52, E58, C55

Suggested Citation

Hansen, Stephen and McMahon, Michael and Tong, Matthew, The Long-Run Information Effect of Central Bank Communication (January 25, 2019). Bank of England Working Paper No. 777, Available at SSRN: https://ssrn.com/abstract=3324318 or http://dx.doi.org/10.2139/ssrn.3324318

Stephen Hansen

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, Oxfordshire OX1 3UQ
United Kingdom

Michael McMahon

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Matthew Tong (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
36
Abstract Views
395
PlumX Metrics