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Reading Between the Lines : Objective Function Estimation using RBA Communications

Author

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  • Gao, Robert

    (Monash University)

Abstract

We use a dictionary based natural language processing approach to quantify the sentiment of RBA communications. This measure of sentiment is then used as a proxy for loss in the estimation of the RBA’s objective function. We find that RBA communications imply a target for average inflation between 2.4% to 2.7% for short run horizons of up to one year ahead, consistent with the RBA’s medium term inflation target band of 2-3%. This result is robust to different forms of communication, forecast horizons, and allowing for asymmetric preferences. We also find that the RBA’s loss improves with rising output growth, commodity prices and stock market returns, as well as an appreciating exchange rate and falling unemployment.

Suggested Citation

  • Gao, Robert, 2021. "Reading Between the Lines : Objective Function Estimation using RBA Communications," Warwick-Monash Economics Student Papers 21, Warwick Monash Economics Student Papers.
    • Handle: RePEc:wrk:wrkesp:21
    as

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    File URL: https://warwick.ac.uk/fac/soc/economics/research/wmesp/manage/21_-_robert_gao.pdf
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    References listed on IDEAS

    as
    1. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Simon Guttmann (ed.),The Future of Inflation Targeting, Reserve Bank of Australia.
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    3. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
    4. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
    5. Reserve Bank of New Zealand, 2011. "For the record," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 74, pages 51-60, June.
    6. repec:nzb:nzbbul:mar2013:05 is not listed on IDEAS
    7. Reserve Bank of New Zealand, 2011. "For the record," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 74, pages 1-7, December.
    8. Guy Debelle, 2001. "The Case for Inflation Targeting in East Asian Countries," RBA Annual Conference Volume (Discontinued), in: David Gruen & John Simon (ed.),Future Directions for Monetary Policies in East Asia, Reserve Bank of Australia.
    9. Zeileis, Achim, 2004. "Econometric Computing with HC and HAC Covariance Matrix Estimators," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 11(i10).
    10. Reserve Bank of New Zealand, 2011. "For the record," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 74, pages 46-56, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    central bank ; natural language processing ; objective function ; Reserve Bank of Australia ; text analysis JEL Classification: E58 ; E5;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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