Abstract: Forward guidance is an innovative monetary policy tool used to manage expectations. Clarifying the policy semantics and mechanism of the central bank's forward-looking guidance is of great significance for improving the monetary policy framework. This paper adopts the text analysis techniques to measure the policy semantics of China's monetary policy forward guidance from the two dimensions: policy orientation and economic prospects. It also separates interest rate expectations and term premiums through a macro financial affine term structure model. On such a basis, this study explores the transmission mechanism of the forward guidance using an exponential generalized autoregressive conditional heteroskedasticity model and a time-varying Granger causality test. The findings show that the forward guidance emphasizes more the noise reduction function of the expectation channel, but cannot affect the interest-rate expectations through transmitting new information. The policy-inclination forward guidance can more effectively fulfill the noise reduction function, whereas the economic-outlook forward guidance cannot guide the direction of future interest rate expectations. Further analysis reveals that an increase in the semantic similarity of policy-inclination forward guidance can significantly reduce the volatility of short-term interest rate expectations, and that economic-outlook forward guidance is more likely to influence the medium and long-term interest rates through uncertainty channels dominated by term premiums. Therefore, it is recommended that the People's Bank of China should steadily advance forward communication, refine the cross-cycle policy design based on expectation management, and construct an expectation management system framework with Chinese characteristics.

Key words: forward guidance, expectation channel, term structure of interest rates, term premium