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ECB vs Bundesbank: Diverging Tones and Policy Effectiveness

Author

Listed:
  • Peter Tillmann

    (Justus-Liebig-University Giessen, Germany)

  • Andreas Walter

    (Justus-Liebig-University Giessen, Germany)

Abstract

The present paper studies the consequences of conflicting narratives for the transmission of monetary policy shocks. We focus on conflict between the presidents of the ECB and the Bundesbank, the main protagonists of monetary policy in the euro area, who often disagreed on policy over the past two decades. This conflict received much attention on financial markets. We use over 900 speeches of both institutions’ presidents since 1999 and quantify the tone conveyed in speeches and the divergence of tone among both both presidents. We find (i) a drop towards more negative tone in 2009 for both institutions and (ii) a large divergence of tone after 2009. The ECB communication becomes persistently more optimistic and less uncertain than the Bundesbank’s after 2009, and this gap widens after the SMP, OMT and APP announcements. We show that long-term interest rates respond less strongly to a monetary policy shock if ECB-Bundesbank communication is more cacophonous than on average, in which case the ECB loses its ability to drive the slope of the yield curve. The weaker transmission under high divergence reflects a muted adjustment of the expectations component of long-term rates.

Suggested Citation

  • Peter Tillmann & Andreas Walter, 2018. "ECB vs Bundesbank: Diverging Tones and Policy Effectiveness," GRU Working Paper Series GRU_2018_009, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2018_009
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    File URL: https://www.cb.cityu.edu.hk/ef/doc/GRU/WPS/GRU%232018-009%20Tillmann.pdf
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    References listed on IDEAS

    as
    1. Geiger, Felix & Schupp, Fabian, 2018. "With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound," Discussion Papers 27/2018, Deutsche Bundesbank.
    2. Tim Loughran & Bill Mcdonald, 2011. "When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks," Journal of Finance, American Finance Association, vol. 66(1), pages 35-65, February.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Müller, Karsten, 2020. "German forecasters' narratives: How informative are German business cycle forecast reports?," Working Papers 23, German Research Foundation's Priority Programme 1859 "Experience and Expectation. Historical Foundations of Economic Behaviour", Humboldt University Berlin.
    2. Hubert, Paul & Labondance, Fabien, 2021. "The signaling effects of central bank tone," European Economic Review, Elsevier, vol. 133(C).
    3. repec:spo:wpmain:info:hdl:2441/7v8fvu0bf08jcoi4epn8cutjm8 is not listed on IDEAS
    4. Johannes Zahner, 2020. "Above, but close to two percent. Evidence on the ECB’s inflation target using text mining," MAGKS Papers on Economics 202046, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    5. Tillmann, Peter & Walter, Andreas, 2019. "The effect of diverging communication: The case of the ECB and the Bundesbank," Economics Letters, Elsevier, vol. 176(C), pages 68-74.
    6. Paul Hubert & Fabien Labondance, 2019. "Central bank tone and the dispersion of views within monetary policy committees," Working Papers hal-03403256, HAL.
    7. Karsten Müller, 2022. "German forecasters’ narratives: How informative are German business cycle forecast reports?," Empirical Economics, Springer, vol. 62(5), pages 2373-2415, May.
    8. repec:hal:spmain:info:hdl:2441/3mgbd73vkp9f9oje7utooe7vpg is not listed on IDEAS
    9. repec:hal:spmain:info:hdl:2441/7v8fvu0bf08jcoi4epn8cutjm8 is not listed on IDEAS
    10. repec:spo:wpmain:info:hdl:2441/3mgbd73vkp9f9oje7utooe7vpg is not listed on IDEAS
    11. Davide Romelli & Hamza Bennani, 2021. "Disagreement inside the FOMC: New Insights from Tone Analysis," Trinity Economics Papers tep1021, Trinity College Dublin, Department of Economics.

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    More about this item

    Keywords

    Central bank communication; diverging tones; speeches; text analysis; monetary transmission;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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