A recent study held by the European Central Bank (ECB) analysts raises the issue of how the words of central banks affect economic dynamics. Published in the bank’s latest blog, the study results demonstrate that the tone of ECB communications significantly impacts macroeconomic indicators in the euro area.
Methodology for Measuring Tonality
Using natural language processing algorithms, researchers assessed the tonality of each statement made at ECB press conferences and official declarations. Each message was rated on a scale from -2 to +2, where lower values indicate a softer or «dovish» monetary policy, and higher values indicate a stricter or «hawkish» stance. For instance, the phrase «most measures of core inflation continued to decline» would receive a score of -1, while the statement «core inflation dropped sharply» would receive a score of -1.5.
Connection Between Tonality and Macroeconomic Indicators
The study showed that changes in the tone of ECB rhetoric are closely correlated with key economic indicators. For example, shifts in the tone of messages about monetary policy typically precede changes in inflation expectations as reflected in 1-year inflation-linked swaps (ILS). Similarly, changes in the tone of economic messages often precede shifts in GDP growth. These results emphasize that central bank rhetoric not only mirrors current economic data but can also shape market expectations and the economic agenda.
Dynamics of Communication Shocks
Researchers also introduced the concept of «communication shocks» that are changes in tonality not directly related to current or anticipated macroeconomic conditions. Identifying these shocks allowed for isolating changes in tonality that unexpectedly impact the market. As shown, such shocks can significantly affect prices and real economic activity, sometimes even more strongly than traditional monetary shocks.
Study Conclusion
The study findings affirm that carefully considered ECB messages can serve as an effective tool of monetary policy. Understanding how words can shape economic expectations provides central banks with a powerful tool for managing economic processes. However, this also increases their responsibility for choosing words and tones in their communications to minimize the risk of unintended economic fluctuations.
Prepared by: Alen Serik,
expert at Economy.kz portal
