This paper examines whether central bank communication in the three main Central and Eastern European countries adopting an inflation-targeting regime is effective in providing guidance on monetary policy decisions and influencing private agents' inflation expectations and financial market reactions. Modern language processing techniques are applied to central bank publications to build appropriate indices of 'tone'.
Our analysis shows that using a more optimistic 'tone' about the current and prospective state of the economy points to a future increase in policy rates, higher inflation expectations on the part of private agents in the current year, a rise in market interest rates across different maturities and a decline in the leading stock market indices. Hence, communication is a further additional and effective tool available to monetary policy authorities in the main Central and Eastern European countries.
