Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/325312 
Year of Publication: 
2025
Series/Report no.: 
DIW Discussion Papers No. 2137
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
This paper investigates the effectiveness of the European Central Bank's (ECB) communication in shaping market expectations and real economic outcomes. Using a transformer-based large language model (LLM) fine-tuned to ECB communication, the tone of monetary policy statements from 2003 to 2025 is classified, constructing a novel ECB Communication Stance Indicator. This indicator contains forward-looking information beyond standard macro-financial variables. Identified communication shocks are distinct from monetary policy and central bank information shocks. A structural Bayesian VAR reveals that hawkish communication signals favorable economic prospects, raising output, equity prices, and inflation, but also increases bond market stress. These findings highlight communication as an independent and effective tool of monetary policy, while also underscoring the importance of carefully calibrating tone to balance market expectations, and financial stability.
Subjects: 
Monetary Policy
Central Bank Communication
Text Sentiment
Transformer-based Large Language Model
Bayesian Vector Autoregression
Local Projections
JEL: 
C32
E43
E47
E52
E58
Document Type: 
Working Paper

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