Words and deeds in managing expectations: Empirical evidence from an inflation targeting economy

• Published in: Economic modelling 2021-02, Vol.95, p.49-67
• Main Authors: Baranowski, Paweł, Doryń, Wirginia, Łyziak, Tomasz, Stanisławska, Ewa
• Format: Article
• Language: English
• Subjects: Central bank communication; Inflation expectations; Interest rate expectations; Monetary policy; Survey data; Text mining
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2020.12.003

Monetary policy affects private sector expectations through not only its actions, but also its communication. In this paper, we adopt a novel approach to compare the impact of central bank interest rate decisions, macroeconomic projections, and textual content of policy documents on private sector expectations. We demonstrate that the role of central bank communication and decisions differs depending on the variable and the forecast horizon. The reaction of inflation expectations to typical changes in policy communication is stronger than their responses to typical policy decisions, whereas the opposite holds for interest rate expectations. Our findings imply that central banks have a range of measures at their disposal to affect expectations. The ability to use communication in managing expectations is especially important when the scope of reducing interest rates is limited. •We use survey data to examine the expectations channel of monetary policy.•We quantify the role of policy decisions and communication in managing expectations.•The impact differs for interest rate expectations and inflation expectations.•Text-mining methods prove useful in measuring the tone of policy documents.•The tone of communication impacts expectations only in very short horizons.