A Forward Guidance Indicator For The South African Reserve Bank: Implementing A Text Analysis Algorithm

Stellenbosch Working Paper Series No. WP04/2020
 
Publication date: March 2020
 
Author(s):
[protected email address] (Department of Economics, Stellenbosch University)
[protected email address] (Department of Economics, Stellenbosch University)
 
Abstract:

The expansion of central bank communications and the increased use thereof as a policy tool to manage expectations have led to an area of research, semantic modelling, that analyses the words and phrases used by central banks. We use text-mining and text-analysis techniques on South African Reserve Bank monetary policy committee statements to construct an index measuring the stance of monetary policy: a forward guidance indicator (FGI). We show that, after controlling for market expectations, FGIs provide significant predictive power for future changes in the repurchase interest rate (the primary monetary policy instrument). Furthermore, we show that FGIs are primarily driven by inflation expectations, which highlights the strong link between the SARB's communication strategy and its inflation targeting mandate. In fact, we observe a systematic anti-inflation bias in the communicated stance of monetary policy---both absolutely and asymmetrically. The results are, however, sensitive to the selection of the dictionary used to analyse the text.

 
JEL Classification:

C43, C53, E42, E47, E52, E58

Keywords:

Monetary policy, Text analysis, Forward guidance, Inflation targeting

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BER Weekly

27 September 2021
Besides the escalating woes at leading Chinese property group Evergrande, global and domestic financial markets were focused on a slew of central bank policy meetings last week. ...

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