Deciphering financial coverage shocks | VOX, CEPR Coverage Portal


Phillipp Gnan, Maximilian Schleritzko, Maik Schmeling, Christian Wagner 01 August 2022

A regular strategy to assessing financial coverage shocks is to measure high-frequency market worth reactions round central financial institution bulletins (e.g. Nakamura and Steinsson 2018). Financial concept then serves to provide these price-based shocks an financial interpretation. For instance, researchers would infer the information embedded in a financial coverage announcement by evaluating the extent of two-year rates of interest shortly earlier than and shortly after the announcement. If charges elevated, the announcement is interpreted to have revealed information that led to an upward shift in expectations in regards to the path of future brief charges (see, for instance, Bauer and Swanson 2022 for an summary of this literature).

In a current paper (Gnan et al. 2022), we suggest to determine financial coverage shocks instantly from the contents of central banks’ verbal communication with the general public. Put in a different way, as a substitute of inferring an financial interpretation not directly from asset worth actions, we join market responses on to what a central financial institution really says.

Extracting information from central financial institution communication

In our empirical evaluation, we examine the ECB, which has utilized a constant communication technique since its inception. The ECB broadcasts coverage selections after Governing Council conferences and holds a press convention 45 minutes later. The press convention begins with a pre-scripted assertion by the ECB president to clarify the coverage choice and to elaborate on the financial outlook. This assertion accommodates discussions on 5 matters: fee steerage, financial exercise, inflation, monetary & financial circumstances, and fiscal coverage. 

Utilizing textual evaluation, we measure the ECB’s stance in direction of every of those matters for press conferences between January 2002 and July 2020. For fee steerage, we use a guide classification to tell apart indications of easing (-1), unchanged coverage (0), and tightening (1). To quantify stances on the opposite matters, we measure the ECB’s tone by assessing the prevalence of adverse phrases within the subject discussions and assemble stance measures such {that a} increased worth implies a extra constructive tone. Determine 1 exhibits that the ensuing topic-specific measures of ECB stance align effectively with main macroeconomic occasions and turning factors within the euro space. 

Determine 1 Matter-specific ECB stances

To evaluate the precise information embedded within the ECB’s assertion, we use modifications within the topic-specific stances in comparison with the earlier press convention whereas controlling for the general public’s data set previous to the assertion utilizing a broad vary of economic, financial, and coverage (communication) variables.

Central financial institution information and asset costs

We begin by inspecting the influence of modifications within the ECB’s topic-specific stances on risk-free rates of interest throughout all the time period construction, core–periphery sovereign yield spreads, and euro trade charges.1 Determine 2 exhibits how asset costs reply to topic-specific information briefly home windows round ECB press conferences. We plot worth sensitivities which can be vital at the very least on the 10% stage, with darker shading indicating a better stage of significance.

Determine 2 Sensitivities of asset costs to information communicated by the ECB

ECB communication about fee steerage on future rates of interest largely impacts short-term OIS charges such that hawkish information is related to increased 3-month and 2-year charges. Extra constructive communication about financial exercise largely issues for 2-year charges, whereas information about monetary & financial circumstances strikes charges on the lengthy finish of the yield curve (10-year). Monetary & financial circumstances even have a robust impact on euro trade charges in that excellent news are related to an appreciation of the euro towards the greenback, pound, and yen. This discovering is according to current analysis on the position of economic intermediaries in forex markets (e.g. Gabaix and Maggiori 2018). Furthermore, we present {that a} extra constructive ECB communication about fiscal coverage considerably reduces yield spreads of Spanish and Italian versus German authorities bonds. Lastly, we discover that any information about inflation is subsumed by communication about different matters throughout our pattern interval. 

It is very important observe that market responses to topic-specific information can change over time. Determine 3 illustrates such time-variation for fiscal coverage information, which exhibits a very sturdy response in sovereign spreads throughout the European debt disaster (e.g. Mueller et al. 2017). In mild of the present rise in sovereign spreads, this discovering means that communication about fiscal coverage could also be an efficient instrument throughout disaster instances. 

Determine 3 Sensitivities of sovereign spreads to the fiscal coverage information

Notes: At a given time limit, sensitivities are estimated from the earlier 60 press conferences.

Financial coverage shocks by way of the lens of central financial institution communication

Our text-based, topic-specific information measures additionally enable for a validation of the financial interpretations related to price-based measures of financial coverage shocks (see Arouba and Drechsel 2022 for an instance of an alternate strategy primarily based on CB communication). The current literature has proposed a spread of such shock measures primarily based on the joint responses of rates of interest with totally different maturities and/or inventory costs. Determine 4 summarises how three units of shock measures steered by earlier analysis might be related to the topic-specific information that we determine from ECB statements.

Determine 4 Sensitivities of financial coverage shocks to information communicated by the ECB

We begin with shocks to the time period construction of rates of interest, characterised when it comes to the three components steered by Altavilla et al. (2019): a timing issue (which displays short-term yields), ahead steerage (the center of the yield curve), and a quantitative easing (QE) issue (long-term yields). Corroborating the interpretations in Altavilla et al. (2019), we discover that their timing issue is pushed by information about fee steerage, their ahead steerage issue is considerably associated to information about financial exercise, whereas their QE issue is usually pushed by information about monetary circumstances. 

Subsequent, we examine shocks recognized from the joint response in rates of interest and inventory costs, which earlier analysis has used to tell apart worth results resulting from modifications in financial coverage from results resulting from different data revealed by central banks (e.g. Nakamura and Steinsson 2018, Miranda-Agrippino and Ricco 2021, Jarociński and Karadi 2018, Cieslak and Schrimpf 2018).  The instinct for distinguishing coverage shocks from data shocks through signal restrictions on rates of interest and inventory returns is as follows. Suppose a central financial institution announcement is accompanied by an surprising improve in rates of interest. In case of a coverage shock, one ought to observe that inventory costs lower, resulting from increased low cost charges. Against this, in case of an data shock from unexpectedly excellent news in regards to the financial system, one ought to observe a rise in inventory costs as effectively, resulting from increased cash-flow expectations. Our text-based ECB information measures enable us to confirm such price-based interpretations, and we accomplish that for 2 units of shock measures.

First, we determine coverage and knowledge shocks as proposed by Jarociński and Karadi (2018). Our findings recommend that the price-based interpretations are according to the precise information communicated by the ECB: coverage shocks load considerably on information about fee steerage, whereas data shocks are considerably associated to information about financial exercise (however to not information about rate steerage). Therefore, our outcomes assist the notion of coverage vis-a-vis data shocks as distinct dimensions of reports communicated by the ECB.

Second, we observe Cieslak and Schrimpf (2018), who take into account financial and progress shocks, that are much like the shocks of Jarociński and Karadi (2018), and moreover threat premium shocks; the extra construction of their identification arises from utilizing short- and long-term rates of interest.  According to their interpretations, we discover that financial shocks are intently associated to information about fee steerage, progress shocks are most intently associated to financial exercise, and that threat premium shocks are considerably affected by information about monetary circumstances. The final result’s, once more, according to the position of intermediaries for asset costs.  


Our findings present that information instantly extracted from the ECB’s press convention statements might be helpful for understanding how market costs of various property reply to central financial institution bulletins. Utilizing our text-based strategy avoids having to depend on oblique interpretations which can be frequent within the literature on financial coverage shocks; as a substitute, the financial rationale stems instantly from the central financial institution’s communication. 

By fine-tuning their topic-specific communication, central banks can have an effect on totally different segments of economic markets in numerous methods, which ought to be significantly helpful in turbulent instances. The time-varying nature of communication results means that market members are involved with totally different matters at totally different instances, and it’s conceivable that inflation communication could turn out to be extra necessary within the present macroeconomic surroundings.


Altavilla, C, L Brugnolini, R S Gürkaynak, R Motto and G Ragusa (2019), “Measuring euro space financial coverage”, Journal of Financial Economics 108: 162-179.

Auroba, B and T Drechsel (2022), “Identifying financial coverage shocks: A pure language strategy”,, 17 Could. 

Bauer, M D and E T Swanson (2022), “A Reassessment of Financial Coverage Surprises and Excessive-Frequency Identification”, CEPR Dialogue Paper No. 17116.

Cieslak, A and A Schrimpf (2018), “Financial and non-monetary information in central financial institution communication”,, 22 0ctober.

Ehrmann, M, S Holton, D Kedan and G Phelan (2022), “Views on financial coverage communication by former ECB policymakers”, 17 January 2022.

Gabaix, X and M Maggiori (2015), “Worldwide liquidity and trade fee dynamics”, The Quarterly Journal of Economics 130(3): 1369-1420.

Gnan, P, M Schleritzko, M Schmeling and C Wagner (2022), “Deciphering Financial Coverage Shocks”, CEPR Dialogue Paper No. 17295.

Jarocinski, M and P Karadi (2018), “The transmission of coverage and financial information within the bulletins of the US Federal Reserve”,, 3 October.

Miranda-Agrippino, S and G Ricco (2021), “The transmission of financial coverage shocks”, American Financial Journal: Macroeconomics 13(3): 74-107.

Mueller, P, A Tahbaz‐Salehi and A Vedolin (2017), “Alternate charges and financial coverage uncertainty”, The Journal of Finance 72(3): 1213-1252.

Nakamura, E and J Steinsson (2018), “Excessive-frequency identification of financial non-neutrality: the data impact”, The Quarterly Journal of Economics 133(3): 1283-1330.


1 All information are from the European Space Financial Coverage Database (EA-MPD) (see Altavilla et al. 2019).



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