Research on the Measurement of Central Bank Communication Index and its Impact on the Macroeconomy

Abstract

With the increasing size of financial assets and the complexity of monetary patterns, countries around the world are gradually becoming more transparent in their monetary policies, using central bank monetary policy communication as a new type of monetary policy instrument. To measure central bank communication more accurately, this paper proposes a dynamic topic model, LDA-BP, based on branching processes, to construct the central bank communication index. At the same time, this paper does four things: it uses the constructed communication index as a proxy variable for the new monetary policy instrument; it builds a TVP-FAVAR model that can extract potential macroeconomic information from many variables, and its time-varying nature can better reflect the dynamic regulatory effect of monetary policy; it constructs a three-dimensional impulse response diagram; and it conducts a systematic analysis of macroeconomic impact. The experimental results of demonstrate its effectiveness on central bank monetary policy communication, as it captures timely information about conventional monetary policy instruments and immediately responds to changes in interest rates and money supply. All three monetary policy instruments are effective in smoothing output volatility, with monetary policy communication having a longer-term impact on the macroeconomy.