Does it Pay to Watch Central Bankers' Lips? The Information Content of Ecb Wording

34 Pages Posted: 3 Nov 2005 Last revised: 20 Aug 2008

See all articles by Friedrich Heinemann

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Katrin Ullrich

Center for European Economic Research (ZEW)

Date Written: 2005

Abstract

In this analysis, the informational content of central bank rhetoric is assessed based on the experience with the ECB since 1999. Among the ECB's communication channels we focus on the monthly press conferences. Based on a counting of certain signal words we construct a wording indicator reflecting the "hawkishness" of monetary rhetorics. For the construction, we develop an objective algorithm representing a learning process of ECB observers. We then integrate this indicator into a standard Taylor type ordered probit model for the explanation of the interest rate. We show that the wording indicator can improve the model's fit when added to the standard explanatory variables. However, a model based solely on this indicator performs worse than the baseline. The results are confirmed by out of sample analysis where the determination of the wording indicators' weights is based on the early ECB period which, subsequently, is excluded from the tests. Our conclusion is that linguistic analysis can improve but not substitute more rigorous forecasting techniques based on hard economic data.

Keywords: Taylor rule, wording, central bank communication

JEL Classification: E52, E43

Suggested Citation

Heinemann, Friedrich and Ullrich, Katrin, Does it Pay to Watch Central Bankers' Lips? The Information Content of Ecb Wording (2005). ZEW - Centre for European Economic Research Discussion Paper No. 05-070, Available at SSRN: https://ssrn.com/abstract=832905 or http://dx.doi.org/10.2139/ssrn.832905

Friedrich Heinemann (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Katrin Ullrich

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

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