Title: Monetary Communication Rules by Laura Gáti and Amy Handlan
Abstract: Does the Federal Reserve follow a communication rule? We propose a simple framework to estimate communication rules, which we conceptualize as a systematic mapping between the Fed's expectations of macroeconomic variables and the words they use to talk about the economy. We provide strong evidence supporting the existence of a communication rule: 30-40 percent of the variation in language of FOMC policy statements is accounted for by variation in Fed forecasts and other policy instruments, like the target rate and asset purchases. We document a significant break in the communication rule in late 2008, over-and-above shifts in the regressors' distributions. There is evidence that communication rules are stronger post-2008 and this impacts how financial markets react. Overall, investors respond to both systematic and non-systematic communication and do so more strongly after 2008, indicating they pay greater attention with more systematic communication.