Research-Thesis: Central Bank Communication Over The Last Decade: Has Forward Guidance Become More Odyssean?

Abstract

This thesis investigates whether central bank forward guidance has evolved into a more "Odyssean" (commitment-based) form over the last decade and evaluates its impact on financial market stability. The study is motivated by the tension between theoretical arguments for binding commitments at the effective/zero lower bound and the practical preference of policymakers for "Delphic" flexibility. To explore this, the research conducts a comparative analysis of the Federal Reserve and Sveriges Riksbank, examining their communication strategies across varied macroeconomic regimes, including the COVID-19 pandemic.

Methodologically, the study employs a dictionary-based sentiment analysis using a customized version of the Loughran and McDonald financial lexicon, extended with specific terms derived from Campbell et al. (2012) to distinguish between Odyssean and Delphic tones. These sentiment indices are tested against daily absolute changes in 2-year and 5-year government bond yields using an OLS regression framework with robust standard errors.

The results indicate that for the Federal Reserve, neither Odyssean nor Delphic tones is robustly associated with yield volatility in baseline specifications. During the COVID-19 crisis, higher Odyssean tone was associated with lower volatility in 2-year yields in some specifications, consistent with a potentially stronger role for commitment wording under extreme uncertainty. Exploratory findings for the Riksbank suggest a positive association between commitment language and volatility, though these results are constrained by sample size limitations.

By integrating natural language processing with financial econometrics, this research contributes a transparent design to quantify forward guidance types and highlights the empirical challenges of mapping theoretical policy constructs into textual indicators, suggesting that communication effects are context-dependent rather than structurally uniform.