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The Predictive Power of Central Bank Communication: Evidence from Mexico

Author

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  • Andres Christian Admin De la Huerta Avila

    (Facultad de Economia, Universidad Nacional Autonoma de Mexico)

Abstract

Understanding the impact of central bank communication on the effective transmission and predictability of monetary policy is paramount. In this paper, we analyze the role of Banco de México’s qualitative communication and its potential scope for guidance by implementing Natural Language Processing. Using a Latent Dirichlet allocation model and dictionary-based sentiment analysis, we develop a Hawkish-Dovish Tone index to measure the bias of Banco de México’s monetary policy statements. We then incorporate this index into an ordinal logit regression to further evaluate the predictive power of Banco de México’s talk. Our findings show that a rate hike (cut) and a hawkish (dovish) message are associated with higher odds of observing a restrictive (accommodative) decision at the next monetary policy meeting, and communication captures information not reflected in traditional macroeconomic variables. Yet, when it comes to accurately anticipate future interest rate decisions, the information provided in policy statements has limited predictive value.

Suggested Citation

  • Andres Christian Admin De la Huerta Avila, 2024. "The Predictive Power of Central Bank Communication: Evidence from Mexico," Sobre México. Revista de Economía, Sobre México. Temas en economía, vol. 1(9), pages 83-127.
    • Handle: RePEc:smx:journl:09:83:127
    as

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    File URL: https://sobremexico-revista.ibero.mx/index.php/Revista_Sobre_Mexico/article/view/139
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    References listed on IDEAS

    as
    1. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
    2. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    3. Ehrmann, Michael & Fratzscher, Marcel, 2007. "The timing of central bank communication," European Journal of Political Economy, Elsevier, vol. 23(1), pages 124-145, March.
    4. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    5. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
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    More about this item

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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