Abstract
In this study, I investigate the relationship between the 12-month ahead inflation expectations and the tone used in the Federal Open Market Committee (FOMC) statements from the past decade (January 2009 – December 2018). The tone index is built using two different approaches: the dictionary method with a phrase-based lexicon and the Structural Topic Model. This index is then incorporated as one of the independent variables in regressions, along with the macroeconomic variables. I demonstrate that there is a positive relationship between inflation expectations and the tone of the FOMC statements. Throughout the last decade, an overall increasing trend of hawkishness in the FOMC statements is discovered; in addition, a hawkish tone is accompanied by the FOMC committee’s decision of increasing the target federal funds rate. It is also worth noting that the results generated from both approaches strongly support the conclusions mentioned above.
Table of Contents
Introduction....................................................................................................................................1 Review of Literature.......................................................................................................................3 Data...............................................................................................................................................7 Methodology..................................................................................................................................8 Results.........................................................................................................................................10 Discussion....................................................................................................................................19 Conclusion....................................................................................................................................22
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