The Role of Central Banks and Big Data in Economic Stability

The Role of Central Banks and Big Data in Economic Stability

Central Banking

A central bank is a governmental agency responsible for administering a nation’s or a consortium of nations’ currency and regulating the money supply in circulation. The primary purpose of central banking is to ensure price stability. In several nations, legislation mandates that central banks take measures to promote full employment. Establishing the interest rate is a fundamental instrument used by central banks, serving as the cost of capital integral to monetary policy. A central bank cannot be classified as a commercial bank. An person cannot establish an account with a central bank. A central bank is a public institution that operates without profit motivation. A central bank functions as a banking institution for commercial banks, therefore influencing the monetary flow and credit throughout the economy to achieve price stability (ecb.europa.eu 2022).

Sentiment analysis is a method used to determine if a text is favorable, negative, or neutral. This analysis aids in assessing various perspectives. Sentiment analysis of the central bank's discussion papers reveals that certain keywords are used to articulate good and negative financial and economic conditions. The affirmative terms include attain, benefit, outperform, efficiency, advance, stability, versatility, strength, favorable, enhance, upgraded, improve, strengthened, and smooth. The negative terms include corrupt, bottleneck, bankruptcy, fallout, downgrade, stagnate, imbalance, monopoly, challenge, adverse, deteriorate, escalate, stagnation, worsen, and vulnerability (bbvaresearch.com 2022). A European Central Bank discussion paper titled “Product Market Structure and Monetary Policy: Evidence from the Euro Area” was published in 2022 (ecb.europa.eu). In this study, the term 'stressed nations' is used many times. The term 'stress' has a negative connotation, hence the tone of this discussion paper may be seen as negative. The Central European Bank's discussion paper titled “Monetary policy in a low interest rate environment: reversal rate and risk-taking” often used the term ‘benefit,’ suggesting a positive tone, since ‘benefit’ connotes a favorable meaning (ecb.europa.eu 2022).

The European Central Bank has implemented a distinct strategy for the enterprise data governance framework, endorsed by the Office of the Chief Data Officer (OCDO). This framework encompasses the Board Data Council, comprising seven voting members and ten liaisons; the Data Governance Committee, which includes the Chief Data Steward; the Enterprise Data Domain Data Steward Team, consisting of the Chief Data Steward, Business Data Steward, Source Data Steward, and Technical Data Steward; and the Data Management team (ecb.europa.eu 2022). Every committee and team is interrelated. The Data Management team oversees data architecture and modeling, requirement fulfillment, metadata management, data quality assurance, data and content management, data security and access, and data operations (ecb.europa.eu 2022). The Board Data Council and Data Governance Committee pertain to the strategic components of the system, whereas the Enterprise Data Domain Data Steward Team falls under the tactical side. The Data Management team is part of the functional component of the enterprise data governance framework (ecb.europa.eu 2022).

Sentiment Analysis

Big data may facilitate policy rate-setting that aids in stabilizing inflation and decreasing unemployment to its natural rate in the following ways:

1. Big data may aid local government in gathering extensive micro-level administrative data, facilitating improved monitoring and forecasting of economic activities.
2. The statistical strength of big data enhances the potential of panel studies to illuminate several economic dimensions, such as income distribution (bsi-economics.org 2022).
3. Big data signifies a substantial volume of information used to monitor economic operations in the private sector in real time, serving as a potent instrument for monitoring economic activity with more frequency and granularity than conventional survey data.
4. Indirect measures of big data, such as social media postings or search queries, may serve as reliable proxies for indicators like consumer confidence or employment (bsi-economics.org 2022).
5. Big data, characterized by its substantial volume, significantly enhances several economic metrics.
6. The use of big data enhances the understanding of the impacts and consequences generated by economic policies and events (bsi-economics.org 2022).

Big data has the potential to facilitate financial stability. Central banks globally are enhancing their utilization of big data to bolster financial stability. Certain operating systems, such as settlement and payment systems, create substantial data, which is collected for various analytical purposes. These systems gather daily data on money market transactions, which is used to analyze the effects of various economic and financial policies aimed at evaluating financial stability (bis.org 2022). The central banks are now seen to selectively choose their new data sources. Financial market data are regularly sent from Bloomberg or Reuters to observe various trends. The use of scanner data or online pricing is another focal point for central banks, since this information aids in assessing inflation and its persistence. All these factors suggest that big data has significant potential to enhance financial stability. The use of big data for various purposes significantly enhances financial stability research via the utilization of data sources such as bank balance sheets, trade repositories, and credit registries (bis.org 2022).

Central banks are aggressively using big data for several objectives, including research, monetary policy, and financial stability. Additional domains where big data is used including oversight and regulation. The economic research conducted by central banks is bolstered by big data via the use of nowcasting models that leverage this data. These models use high-frequency forecasts that central banks may update in real time. Although nowcasting is mostly used for predicting gross domestic product or private consumption, central banks are now using it in other advanced domains (bis.org 2022). Some models forecast inflation dynamics based on online retail sales, while others derive unemployment rates from various job sites. The use of nowcasting and real-time economic data is evident during periods of significant economic uncertainty, such as the COVID-19 crisis. Big data are extensively used in smart document management systems inside central banks, facilitating the proactive dissemination of material to personnel based on their historical reading habits (Bholat 2015). Central banks assess several facets of economic operations with big data. For example, they use natural language processing to generate economic or policy uncertainty indices from textual data and to assess opinion about stated monetary policies, especially unconventional monetary policy initiatives. The preceding sections have addressed the use of big data in promoting financial stability (bis.org 2022). Consequently, the use of big data in these ways might alter the central bank's internal activities and reshape the exterior economic and financial systems.

Central banks have begun to use big data to a greater and more sophisticated degree in almost all of their functions. Big data is revolutionizing the mentality of central banks, shifting it towards a data-driven and data-centric approach. Consequently, central banks have grown proficient in establishing best practices by emphasizing data management and governance (ecb.europa.eu 2022). Consequently, it is advised that central banks refine their analytical frameworks to get improved insights across many domains, data sets, trends, and other factors. Utilizing big data will enable central banks to adopt transparency and interact with open data effectively.

Summary

Sentiment analysis indicates that the European Central Bank use certain key phrases that might evaluate the tone of its discussion papers. phrases such as benefit, attain, and strength are used in a positive context, whereas phrases like corrupt and stress are utilized in a negative tone. The European Central Bank employs many committees and teams within its corporate data governance structure to guarantee effective data management. Big data enables the study of extensive datasets including several categories, and this analysis aids in policy rate determination by offering diverse insights. Moreover, central banks extensively use big data to uphold financial stability, modify internal operations, and remodel economic and financial systems. Given these advantages, it is advisable for central banks to use big data for sophisticated applications.

References

Bank, E. 2021. What is a central bank?, European Central Bank. Available at:

https://www.ecb.europa.eu/ecb/educational/explainers/tell-me/html/what-is-a-central-bank.en.html (Accessed: 25 January 2022).

Bbvaresearch.com. 2022. A Big Data approach to understand Central Banks. Available at: https://www.bbvaresearch.com/wp-content/uploads/2018/11/Understanding_CentralBanks_BigDataSpain2018_.pdf (Accessed: 25 January 2022).

Bholat, D., 2015. Big data and central banks. Big Data & Society, 2(1), p.2053951715579469.

Bis.org. 2022. BIS Working Papers No 930 Big data and machine learning in central banking. Available at:

https://www.bis.org/publ/work930.pdf (Accessed: 25 January 2022).

Bis.org. 2022. Financial instability: can Big Data help connect the dots? Available at:

https://www.bis.org/speeches/sp181203.pdf (Accessed: 25 January 2022).

Bsi-economics.org. 2022. Big Data or the renewal of the economic analysis. Available at:

https://www.bsi-economics.org/images/ENbig-data-eco-analysis.pdf (Accessed: 25 January 2022).

Ecb.europa.eu. 2022. Emerging Opportunities and Challenges with Central Bank Data. Available at:

https://www.ecb.europa.eu/events/pdf/conferences/141015/presentations/Emerging_opportunities_and_chalenges_with_Central_Bank_data-presentation.pdf?6074ecbc2e58152dd41a9543b1442849 (Accessed: 25 January 2022).

Ecb.europa.eu. 2022. Monetary policy in a low interest rate environment: reversal rate and risk-taking. Available at:

https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2593~c97d059554.en.pdf?e913a317e7f48d5afcda925925e4f27d (Accessed: 25 January 2022).

Ecb.europa.eu. 2022. Product market structure and monetary policy: evidence from the Euro Area. Available at:

https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2632~d05437c47c.en.pdf?2a64a2ecb790b9dc4a159a7e086c89fc (Accessed: 25 January 2022).