Linking usage of English language with monetary policy: Role of verbs in Central bank communications..

This is quite an interesting paper by Banca D’Italia economists – Maddalena Galardo and Cinzia Guerrieri.

They look at ECB policy statements and look at verb usage in them – will, expect etc. They use this to figure whether the verbs impact the money markets.

This paper has addressed a relevant question concerning central bank governance, i.e. whether and the extent which the verbal guidance has been effective in shaping the financial markets’ expectations on future short-term interest rates. The answer to this question crucially depends on the way central bank communication is measured. Despite the burgeoning literature on this topic, our paper has proposed a novel approach based on the frequency of future markers in monetary policy statements.

We have considered the European Central Bank communication strategy as a testing case. The main findings are as follows: (i) our verbal guidance index is able to capture the evolution towards explicit forward-looking statements, especially in the aftermath of the Global Financial Crisis and well before the forward guidance on key policy interest rates announced firstly on July 2013;

(ii) the results from the econometric analysis have showed that using a future tense that is perceived by the public as a commitment in pursuing a particular monetary policy stance is indeed effective in shaping future short-term interest rates expectations. In particular, the stronger is the surprise in speaking about future, the stronger is the effect on interest rates, especially for longer horizons.

To conclude, we have performed our analysis during a period characterized mostly by a dovish attitude, and thereof the results are valid in a context of
accommodative monetary policy stance. Although it is not possible to state if these implications hold in a hawkish context too, our results shed light on
the importance of the verbal tenses used to signal future actions.

In the middle of the paper, there is this really interesting discussion on English language and grammar rules which just make the paper quite interesting. It isn’t a typical mechanical paper on central bank communications but stresses on reading the policy statements carefully.

What is next? Role of adjectives?

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