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Imperfect Central Bank Communication: Information versus Distraction

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  • Spencer Dale

    (Bank of England)

  • Athanasios Orphanides

    (Central Bank of Cyprus)

  • Pär Österholm

    (Sveriges Riksbank)

Abstract

Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. If the public is able to assess accurately the quality of the imperfect information communicated by a central bank, such communication can inform and improve the public’s decisions and expectations. But if not, communicating imperfect information has the potential to mislead and distract. The risk that imperfect communication may detract from the public’s understanding should be considered in the context of a central bank’s communications strategy. The risk of distraction means the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public’s understanding to the extent that it “crowds out” a role for communicating imperfect information.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 7 (2011)
Issue (Month): 2 (June)
Pages: 3-39

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Handle: RePEc:ijc:ijcjou:y:2011:q:2:a:1

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  1. Winkler, Bernhard, 2000. "Which kind of transparency? On the need for clarity in monetary policy-making," Working Paper Series 0026, European Central Bank.
  2. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
  3. Frederic S. Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," NBER Working Papers 10829, National Bureau of Economic Research, Inc.
  4. Sibert, Anne, 2006. "Is Central Bank Transparency Desirable?," CEPR Discussion Papers 5641, C.E.P.R. Discussion Papers.
  5. Orphanides, Athanasios & Williams, John C., 2003. "Imperfect knowledge, inflation expectations, and monetary policy," CFS Working Paper Series 2003/40, Center for Financial Studies (CFS).
  6. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
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Cited by:
  1. van der Cruijsen, Carin A.B. & Eijffinger, Sylvester C.W. & Hoogduin, Lex H., 2010. "Optimal central bank transparency," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1482-1507, December.
  2. Salle, Isabelle & Yıldızoğlu, Murat & Sénégas, Marc-Alexandre, 2013. "Inflation targeting in a learning economy: An ABM perspective," Economic Modelling, Elsevier, vol. 34(C), pages 114-128.
  3. Takeshi Kimura & Kosuke Aoki, 2009. "Central Bank's Two-Way Communication with the Public and Inflation Dynamics," 2009 Meeting Papers 108, Society for Economic Dynamics.
  4. Martin Cihák & Katerina Smídková & Ales Bulir, 2008. "Writing Clearly," IMF Working Papers 08/252, International Monetary Fund.
  5. Michael Ehrmann & Marcel Fratzscher, 2013. "Dispersed communication by central bank committees and the predictability of monetary policy decisions," Public Choice, Springer, vol. 157(1), pages 223-244, October.
  6. Pierre L. Siklos, 2013. "The Global Financial Crisis and the Language of Central Banking: Central Bank Guidance in Good Times and in Bad," CAMA Working Papers 2013-58, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Svensson, Lars E O, 2009. "Transparency under Flexible Inflation Targeting: Experiences and Challenges," CEPR Discussion Papers 7213, C.E.P.R. Discussion Papers.
  8. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
  9. Beechey, Meredith & Österholm, Pär, 2012. "Policy Interest-Rate Expectations in Sweden: A Forecast Evaluation," Working Paper 127, National Institute of Economic Research.

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