Measuring central bank communication via a Hawkish-Dovish (HD) indicator

ECB econs propose an indicator which measures the media perception of hawkish-dovish nature of monetary policy:

The growing relevance of communication in the conduct of monetary policy was mirrored by a rising interest of academicians and practitioners. In particular, a branch of economic research increasingly focused on the role of communication in adding valuable information besides what is already contained in macroeconomic variables, and in revealing policy makers preferences on the course of monetary policy with a view to enhance predictability. If the traditional approach consists in analysing how information events impact financial market developments and expectations of future policy moves, more recently analysis shifted towards analysing the language used by the central bank in its statements and how such message is perceived by its stakeholders. This paper contributes to the latter with a numerical indicator, called HD index (after the initials of hawkish and dovish), derived from media reports on the ECB press conference.

Combining concepts and techniques developed in the context of computational linguistics and data mining, the indicator extracts relevant information on ECB monetary policy as reported by external observers and may therefore be interpreted as how media perceive the central banks monetary policy messages. For practical reasons, the perception is expressed on a numerical interval between -1 (most dovish) and +1 (most hawkish). In other words, the indicator indicates whether the perceived tone on monetary policy communication is predominantly on the tightening side (hawkish perception) or rather on the loosening side (dovish perception). Although the approach to quantify communication is not new, the approach proposed in this paper is original in various dimensions.

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