Monetary policy sentiment index: part II
This is the second part on the Monetary policy sentiment score, here we compare the different evolution of the MPSS for the four different Central Banks, and finally we will include a brief analysis of the MPS during the Covid-19 pandemic.
Comparison between Central Banks
Sentiment analysis of the central bank’s communications yields an overview of the total development of its messages over time. In this section, we survey the developmental trajectory of the interest rate and monetary policy sentiments. Developments in the economic condition sentiment index during the 2008–2021 period reveal significant differences between countries.
First, for descriptive purposes, we minimize these sentiment index disturbances by using a specific number of moving averages for each country due to the extension of each database. Second, our methodological approach to calculating the sentiment index does not differ between lexicons. Thus, one should compare sentiment index trends and raw absolute numbers too. Also, each plot indicates the date when the interest rate changed due to the introduction of central banks purchasing longer-term securities.
For example, in Figure 1.1 we can see that the economic sentiment for the BoE communications was pessimist during 2008 and mid-2013, although its tone improved later, in line with the recovery of the euro area in the aftermath of the financial crisis, from 2014 until mid-2019 swaying, with the appearance of Covid-19 the index starts a decline phase until the beginning of 2021.
The ECB’s economic sentiment presented a deterioration from 2008 and recovered slightly until mid-2011, after that it showed a constant negative trend registering dips in 2013 and the first quarter of 2016 with the onset of the euro-area financial/debt crisis. The ECB announced a significant downward forecast revision in their press conferences in November 2011. The negative economic outlook during the euro area crisis culminated in mid-2016. In 2017, the economic sentiment started gradually improving again, in line with the onset of the euro area’s economic recovery until the appearance of Covid-19, the index faced a dip decline for mid-2021.
On the other hand, for the Fed, Figure 1.3 shows similar developments in the monetary policy sentiment index over the past decade and a half, its evolution shows a similar pattern, with the only difference of the absence of the 2016 dip, regarding the Covid-19, the sentiment index declined in the first quarter of 2019. Finally, in Figure 1.4 the evolution of the index for the BoJ shows a negative sentiment during 2008 until 2012, its negative dip was registered at the beginning of 2009, after 2013, it showed a stable path, and even it shows a more positive tone from 2018 until the appearance of Covid-19, where it followed a negative trend, it doesn’t seem to recover an optimistic tone for the following months.
A positive shock to Central Bank communication seems to have a positive and significant impact on the interest rate, but negative on the yield curve slope (consistently with Armelius et al., 2020). The Central Banks’ sentiment indexes appear to be connected (with the sole exception of BoE and BoJ) and the most relevant spillovers are between the Fed and the ECB.
This finding could signal a permanent change in communication by central banks: the financial crisis might have induced them to become more cautious when communicating with the public. Releases and speeches are in effect less positive in their content. Moreover, it is important to consider that the recovery from the Great Recession was not synchronized among economic areas, with the Eurozone struggling more than the other countries to return to pre-crisis growth levels. This fact might have contributed to the higher negative impact on ECB sentiment vis-`a-vis other CBS. Despite a lower indicator on average than at the beginning of the period of analysis, the MPSs improved after the crisis. In particular, the Federal Reserve reached its lowest point in sentiment in 2008 (-0.55), but then sentiment steadily increased in the 2010s. In addition, for the BoE and the BoJ, the MPS improved during the period of economic recovery, although Brexit affected the BoE. This is not the case for the ECB. Indeed, ECB’s average MPS score over the period 2011–2019 is even lower than the average for the period 2008–2010. This might be due to the European debt crisis that characterized the years from 2010 to 2015. Finally, it is remarkable the dramatic drop in sentiment for all Central Banks in 2020 following the worldwide spread of the Covid-19 crisis. In particular, ECB’s sentiment reached its historical minimum in April 2020 (-0.52).
The MPSS during the Covid-19: The case of the Euro area
During the evolution of the Covid-19, we see that the sentiment expressed by the monetary authorities was uncertain, also it is important to mention that other monetary and economic factors have influenced the communique’s tone. The negative MPSS recorded during this period was due to global economic uncertainties and the negative effects of the pandemic.
For this brief example, we will study the case of the ECB (Euro area) from 2020 to the end of 2021. In Figure 2, we plot the MPS index against the Covid-19 incidence for 14 days — at the left side and blue the MPS — the sentiment index of the ECB, and on the other side with a red area, the Covid-19 incidence at 14 days. During the period of the pandemic, the tone and evolution of the MPS index followed the evolution of Covid-19. For example, at the start of the first wave (January 2020 to the end of May 2021), the MPS declined and remained in a negative and volatile tone. In that way, at the beginning of the vaccination phase, the MPS increased and we can assume that the sentiment tone increased and remained positive until July 2022 -the beginning of the fifth wave and it dramatically changed with the appearance of the Omicron variant.
Finally, we extracted the nine most important topics of the ECB’s communique, with a sample of 53 documents for both years, we applied the LDA algorithm for the Topics selection, and then we graph the Word Cloud, as we can see the most important topics were:
Topics table and Word Cloud figure reflects the concerns on growth recovery on uncertainity times, support for favorable conditions, green investment — European Green Deal — , and most important the inflation phenomenon generated by the Covid-19 pandemic.
References
[1] Armelius, H., C. Bertsch, I. Hull, and X. Zhang (2020). “Spread the word: International spillovers from central bank communication”. Journal of International Money and Finance 103, 102116.
Common Informative Acronyms
- MPS -Monetary policy Sentiment Index.
- FED -Federal Reserve.
- ECB -European Central Bank.
- BOE -Bank of England.
- BOJ -Bank of Japan.
