Enhancing monetary policy impact: evaluating the effectiveness of Central Bank communication in shaping inflation expectations

Abstract

As the economic environment becomes more complex and exposed to external shocks that complicate the mandate of inflation-targeting banks, Central Banks are turning away from conventional monetary tools and implementing efficient but unconventional tools, such as communication. However, its implementation only guarantees results with the correct use of the following components: readability, complexity, and tone. Communication works as a double-edged sword; in its efficient use, it can reduce economic uncertainty, reinforce central bank credibility, and anchor inflation expectations. Otherwise, it can create more noise, distrust, and inconsistency within monetary policy deciding groups. Therefore, the analysis of these three components is of utmost importance for their correct implementation in the primary communication instruments used by Banco de Mexico: the Minute and Monetary Policy Statement. This thesis aims to perform an exploratory analysis of the Minute and Statement using readability metrics and dictionary methodology. It will measure communication efficiency based on comprehensibility, complexity, and tone within a hawkish and dovish threshold. It will further resolve the language barriers that cloud the efficiency of communication analysis for Spanish tests by creating a Dictionary and Tone indicator to measure tone projection capabilities for key macroeconomic variables, especially for anchoring inflation expectations.