Do Words Matter? Evidence from Bank Indonesia’s Communication, Interest Rates, Inflation, and Stock Market Volatility
Keywords:
central bank communication, monetary policy, sentiment, clarity, stock market volatilityAbstract
While many studies have explored the effects of interest rates and inflation on financial market volatility, far less is known about how central bank communication interacts with these channels in emerging markets. This study examines how Bank Indonesia’s communication, specifically its sentiment and clarity, moderates the impact of key macroeconomic variables, namely the policy interest rate and inflation, on stock market volatility in Indonesia. Using Natural Language Processing (NLP) techniques on official speeches from 2014 to 2024, this study estimates moderation regression models with Ordinary Least Squares (OLS) as a baseline and Robust Least Squares (RLS) to reduce the influence of outliers and obtain more reliable estimates under potential heteroskedasticity. Results indicate that both positive sentiment and clear communication from Bank Indonesia are associated with reduced market volatility. However, heightened clarity can intensify market reactions when policy moves are aggressive or unexpected. Increases in policy rates and effective inflation control both help stabilize volatility, but their impact depends in part on the quality of central bank communication. Robustness checks confirm the stability of these findings across estimation methods and in the presence of outliers. Overall, the findings provide new evidence from an emerging market context and show that well-designed central bank communication can shape how financial markets respond to interest rate and inflation shocks, offering concrete guidance for improving monetary policy communication in Indonesia.
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Copyright (c) 2025 Hasta Dwi Pradana, Irni Yunita, Andry Alamsyah; Hillary Hapsari Putri
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