AI Listening to Central Banks: From Words to Markets and Macroeconomic Outcomes

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Abstract
Central banks play a crucial role in maintaining economic stability and ensuring the proper functioning of financial markets. Their communication can significantly influence the economy by shaping market participants’ perceptions and expectations. While most existing research on this topic focuses on the U.S. Federal Reserve or the European Central Bank, this paper provides a novel perspective by applying large language models to analyze the minutes of monetary policy meetings from Central and Eastern European central banks and their impact on key macroeconomic and financial indicators. The results show that, even for these economies, the informational content embedded in official communication has explanatory power, offering valuable insights for a region that remains relatively underexplored in the literature. The impact is particularly evident on the interbank money market, while the responses of other market segments are mixed, reflecting the predominantly bank-based structure of these financial systems. Furthermore, the analysis conducted through a Bayesian structural VAR model highlights a close link between central bank communication and macroeconomic developments in the studied economies. In particular, communication appears to be interpreted in a dual manner, reflecting both expectations of future monetary policy actions and information about underlying economic conditions. By documenting the relevance of communication shocks in Central and Eastern Europe, this paper extends the literature on monetary policy transmission and emphasizes the importance of considering communication as a complementary tool to conventional policy instruments.

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