The long-run information effect of central bank communication

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 25 January 2019

Staff Working Paper No. 777

By Stephen Hansen, Michael McMahon and Matthew Tong

Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England’s Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.

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