DP13438 The Long-Run Information Effect of Central Bank Communication

Author(s): Stephen Hansen, Michael McMahon, Matthew Tong
Publication Date: January 2019
Keyword(s): communication, Machine Learning, monetary policy
JEL(s): C55, E52, E58
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13438

Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England's Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.