The Impact of Central Bank Communication on Private Inflation Expectations: A Study by Prof. Mellina

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The Department of Economics and Social Sciences welcomed Prof. Sathya Mellina for a special lecture on Oct 23. Prof. Mellina presented his current empirical research on the impact of the words adopted by the Federal Reserve on private inflation expectations.

Sathya Mellina

Professor Sathya Mellina

Prior the 1990s, traditional central banks were arcane institutions whose policies were secretly pursued and implemented. Over the last few decades, the opacity surrounding traditional central banks’ monetary policy has been dissolving at an accelerating pace. Many central banks changed significantly their practice due to the benefits from managing public expectations. As a powerful part of a central bank’s toolkit, their communication revealed itself as efficacious tool to pursue the goal of managing such expectations. More technically, the words of central bankers are adopted to convey vital information to the public and financial market participants. It is widely agreed that their communication is employed to move financial markets, enhance the predictability of monetary policy decisions, and help to achieve central banks’ policy objectives.

More recently, in these years characterised by financial upheaval and unconventional monetary policies, a greater attention from the policymakers has been devoted on public inflation expectations. The latter are considered by many traditional central banks as a primary information source for the effectiveness of their price stability objectives. In this respect, central bank communication plays a crucial role for driving such public expectations correctly. As a further result, an increasing attention has been paid to central bank communication in economic literature. A small, but growing literature is indeed emerging, in which central bankers’ words are treated as data. Such unstructured “text data” may include meeting transcripts, minutes of meetings and statements disclosed by monetary policymakers.

In this research, Prof. Mellina first applies text mining techniques, statistical and automated techniques imported from the field of computer science, to extrapolate quantitative metrics of communication from the Federal Open Market Committee (the branch of the Federal Reserve Board that determines the direction of monetary policy) post-meeting statements. These statements represent one of the primary mean of communication by the Federal Reserve. Then, the author assesses how communication shocks from these documents impact on private inflation expectations.

Overall, the empirical findings documented in his study point to a limited and heterogeneous role of central bank communication in steering private inflation expectations and suggest that, in the near future, policymakers are required to produce greater efforts, innovations, and new strategies within their communication practice. Finally, central banks have a further crucial task: their target should be a much broader non-specialist audience.

Sathya Mellina is a Visiting Lecturer in Economics and Finance at John Cabot University in Rome. His main research areas of interest are empirical macroeconomics, central banking design, and text mining applied in economics. He is currently completing his Ph.D. in Economics at Loughborough University (UK). During his Ph.D. studies, he joined the Economic Research Centre of Deutsche Bundesbank (Germany) and the Macro Directorate of the National Institute of Economic and Social Research (UK) for a Ph.D, internship.