Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/298852 
Year of Publication: 
2024
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 6/2024
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We depart from the common reaction function-based approach used to infer central bank preferences. Instead, we extract the tone from the textual information in the central bank communication using both a lexicon-based approach and a language model. We combine the tone with real-time information available to the monetary policy decision-maker and directly estimate the loss function. We find strong and robust evidence of asymmetry in the case of the European Central Bank during 1999-2021: the slope of the loss function was roughly three times steeper when inflation exceeded the target compared to when it was below the target. This represents a significant departure from the quadratic and symmetric monetary policy loss function typically applied in macro models.
Subjects: 
central bank communication
textual analysis
language models
asymmetric loss function
optimal monetary policy
JEL: 
E31
E52
E58
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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