Who is leading in Communication Tone? Wavelet Analysis for the Fed and the ECB

In this paper, we examine the interdependence of the communication tones of the Fed and the ECB, arguably the two most influential central banks (CBs). The interdependence of monetary policies is expected as price fluctuations may spill over between countries or country blocks via trade links or other events such as global economic crises, pandemics, etc. We examine the relationship between the two CBs in the time and frequency domains, which we believe is crucial to scrutinizing the dynamics over the long time horizon, which is susceptible to transitions using wavelets that allow for short-, medium-, and long-term linkages to be revealed. Furthermore, we measure sentiments (tones) of the two CBs using two complementary methodologies in the analysis of economic and financial texts, i.e., a lexicon-based approach and FinBERT as a transformer-based approach. Our empirical findings suggest that the relationship between the two CBs is dynamic in the time and frequency dimensions, and there is no static leading role assigned to any of the CBs. Moreover, the lexicon-based and transformer-based algorithms are relatively similar in the medium run, which may suggest that alternative methodologies are also complementary. To the best of our knowledge, our study is the first to scrutinize the relationship between the communication tones of two CBs taking into account the dynamics in the time and frequency dimensions and using both lexicon-based and transformer-based methods.