Central bank narratives shape media, move inflation expectations

A Bank of England working paper introduces a novel framework to measure how central bank policy messages reach households, moving beyond traditional asset-price-based identification.

Authors Eric Tong and Rennae Cherry construct communication shocks from central bank texts and pre-announcement newspaper narratives, capturing public policy expectations.

These 'narrative surprises' are then decomposed into stance communication shocks, reflecting unexpected policy stance, and information communication shocks, conveying the central bank's economic assessment.

Applied to the Bank of Canada, Bank of England, and Federal Reserve, the framework reveals that central bank narratives significantly shape media coverage, influencing households' one-year-ahead inflation expectations.

This approach underscores the importance of measuring communication as the public experiences it, rather than solely through financial market reactions.

The paper's empirical results demonstrate that tighter stance communication shocks lower households' one-year-ahead inflation expectations by approximately 0.1 percentage point, with responses persisting for 5–12 months.

Conversely, expansionary information communication shocks raise expectations, peaking at 0.1 percentage point after 14 months in the United Kingdom.

These communication shocks explain about ten percent of the unexplained variation in household inflation expectations at the 12-month horizon in the UK and US.

A key finding is that households' attention, measured by newspaper coverage, significantly amplifies the effect of stance communication shocks and brings forward their impact in the UK and US.

This underscores the conditional nature of communication effectiveness.