When the Fed Speaks: Arguments, Emotions, and the Micro-foundations of Institutions

Abstract

This study investigates what happens when a central authority figure makes explicit the taken-for-granted assumptions underlying an institution. Using all public speeches made by the Chairperson of the United States Federal Reserve from 1998 to 2014, I tested the relationship between the explicitness of assumptions within Chairperson arguments and market uncertainty, as measured by market volatility (i.e., the VIX Index). I found that exposing institutional assumptions to direct examination creates uncertainty and instability in the market. I also found that speeches conveyed in a more positive tone suppressed this effect, while higher levels of fear in the market before the speech amplified this effect. This study contributes a new perspective on arguments and emotions as micro-foundations of institutions, provides new insights for work looking at the sociology of financial markets, and more broadly opens new avenues of research on the relationship between language and institutions.