Effects of Banco de la Republica's communication on the yield curve

This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".

Summary

Focus

Communication is nowadays an essential instrument in the conduct of monetary policy. Consequently, central banks are interested in assessing their communications strategies in order to determine whether or not information is disseminated with clarity and in such a way that they contribute to the effectiveness of monetary policy.

Contribution

We analyze Banco de la Republica's (Colombian Central Bank) communication by studying the effect on interest rates at different terms (i.e. the yield curve) of the delivery of information to the public through two different outlets, the minutes of the monetary policy committee's meetings and inflation reports. We analyze both numeric and textual information (from 2011-Q2 to 2018-Q4) to determine whether or not there is a significant impact of Banco de la Republica's communication on the yield curve. The methodology also allows us to determine the specific types of information that explain such an impact.

Findings

We find no evidence that numeric information, namely the inflation and output growth forecasts contained in the inflation reports, has an impact on market rates. Regarding narrative information, we find that: (i) for inflation reports, there is evidence that it has a significant effect on just some of the market rates, and (ii) for the minutes, there is a significant impact on all the market rates analyzed. We also find that topics such as "domestic demand and economic sectors" and "inflation: target and inflation expectations" are the most relevant ones in the case of the minutes.

Abstract

We analyze the effect on the yield curve of Banco de la Republica's communication through two specific outlets, the minutes of the monetary policy meetings and the inflation reports during the period 2011-Q2 to 2018-Q4. We extract numeric information from the inflation reports' fan charts, and narrative information -using Latent Dirichlet Allocation, a computational linguistics tool- from the text of both outlets. We use an event-study approach to analyze the impact on four specific maturities: one-year spot, three-year forward, five-year forward and five-year ahead five-year forward rates. We find no evidence that numeric information has any effect on market yields. Regarding narrative variables we find that (i) for the inflation report, there is a significant effect on just two yields (one-year spot and five-year forward), and (ii) for the minute, there is a significant effect on all yields. We believe that these results may be explained by the publication lag of the inflation report during the period of analysis.

JEL classification: E52, E58, C40, G14.

Keywords: communication, monetary policy, text mining, event study, yield curve.