Comment on “The long-run information effect of Central Bank communication” by Stephen Hansen, Michael McMahon, and Matthew Tong

Hansen et al. (2019) highlight an uncertainty effect on long-term interest rates, particularly term premia, of central bank communication using novel measures constructed directly from the text of the Bank of England’s Inflation Report. This comment takes a more in-depth look at these narrative measures, showing that the measures identified as being important for explaining the short-rate expectations and term premia components of interest rates are equally important for explaining overall interest rate movements at all maturities. Furthermore, the signals identified as being important for long-term rates and term premia are indeed correlated with perceptions of uncertainty, but are also related to changes in longer-horizon economic forecasts. This suggests a more balanced view of central bank communications transmitting to long-term interest rates through both short-rate expectations and uncertainty.