Monetary policy is about more than just the latest interest rate decision. It also involves communication about future economic developments and the factors shaping future policy decisions. By steering the expectations of financial market participants, central bank communication shapes the full set of financial market prices across the maturity and risk spectrums, in turn affecting financing conditions and decisions around credit, saving and investment. The decisions of households and firms are also affected by their beliefs about monetary policy, which depend on how the central bank communicates.
I will divide this speech into two parts. In the first part, I will review recent contributions by ECB staff on the science of monetary policy communication. In the second part, I will discuss the practice of monetary policy communication from an ECB perspective.
The science of monetary policy communication
Greater data availability, increased computing power and artificial intelligence have substantially expanded the tools available for analysing central bank communication. Until recently, researchers relied on dictionary-based approaches to quantify the content and tone of monetary policy statements and speeches. This involved categorising specific words and expressions associated with a restrictive or accommodative stance, or with different assessments of inflation and the economic outlook. Machine learning techniques and large language models (LLMs) now allow for the extensive analysis of large volumes of text in a more automated manner, taking into account the context in which words are used instead of relying solely on the frequency of individual words or predefined expressions.