Starting from a blank page? Semantic similarity in central bank communication and market volatility

Press releases announcing and explaining monetary policy decisions play a critical role in the communication strategy of central banks. Due to their market-moving potential, it is particularly important how they are drafted. Often, central banks start from the previous statement, and update the earlier text at the margin. This makes it straightforward to compare statements and see how the central banks thinking has evolved; however, more substantial changes, which will eventually be required, might then be harder to understand. Using variation in the drafting process at the Bank of Canada, this paper studies the extent to which similarity in central bank statements matters for the reception of their content in financial markets. It shows that similar press releases generate less market volatility, but that more substantial textual changes after a sequence of very similar statements lead to much larger volatility.