Central Bank sentiment and policy expectations
Abstract
We explore empirically the theoretical prediction that optimism or pessimism have aggregate effects,
in the context of monetary policy. First, we quantify the tone conveyed by FOMC policymakers in their
statements using computational linguistics. Second, we identify sentiment as the unpredictable
component of tone, orthogonal to fundamentals, expectations, monetary shocks and investors’ sentiment.
Third, we estimate the impact of FOMC sentiment on the term structure of private interest rate
expectations using a high-frequency methodology and an ARCH model. Optimistic FOMC sentiment
increases policy expectations primarily at the one-year maturity. We also find that sentiment affects
inflation and industrial production beyond monetary shocks.
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