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Title: Do the ECBs introductory statements help predict monetarypolicy? Evidence from a tone analysis Authors:  Pawel Baranowski - University of Lodz (Poland) [presenting]
Hamza Bennani - University of Nantes (France)
Wirginia Doryn - University of Lodz (Poland)
Abstract: The aim is to examine whether a tone shock derived from European Central Bank communication helps predict ECB monetary policy decisions. To this purpose, we first use a bag-of-words approach and several dictionaries on the ECBs Introductory Statements to derive a measure of tone. Next, we orthogonalise the tone measure on the latest data available to market participants to compute the tone shock. Finally, we relate the tone shock to future ECB monetary policy decisions. We find that the tone shock is significantly and positively related to future ECB monetary policy decisions, even when controlling for market expectations of monetary policy and the Governing Councils inter-meeting communication. Further extensions show that the predictive ability of the tone shock is robust to (i) the normalization of the tone measure, (ii) alternative market expectations of monetary policy, and (iii) the horizon of macroeconomic variables used in the Taylor-type monetary policy rule. These findings highlight an additional channel through which ECB communication improves monetary policy predictability, suggesting that the ECB may have private information that it communicates through its Introductory Statements.