Abstract
We use the text of financial stability reports (FSRs) published by central banks to analyze the relation between the sentiment they convey and the financial cycle. We construct a dictionary tailored specifically to a financial stability context, which classifies words as positive or negative based on the sentiment they convey in FSRs. With this dictionary, we construct financial stability sentiment (FSS) indexes for thirty countries between 2005 and 2017. We find that central banks’ financial stability communications are mostly driven by developments in the banking sector. Moreover, the sentiment captured by the FSS index explains movements in financial cycle indicators related to credit, asset prices, systemic risk, and monetary policy rates. Finally, our results show that the sentiment in central banks’ communications is a useful predictor of banking crises—a one percentage point increase in FSS is followed by a twenty-nine percentage point increase in the probability of a crisis.
The Role of US Monetary Policy in Banking Crises Across the World