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Central Banks Two-Way Communication with the Public and Inflation Dynamics

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Author Info
Kosuke Aoki
Takeshi Kimura

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Abstract

Using a model of island economy where financial markets aggregate dispersed information ofthe public, we analyze how two-way communication between the central bank and the publicaffects inflation dynamics. When inflation target is observable and credible to the public,markets provide the bank with information about the aggregate state of the economy, andhence the bank can stabilize inflation. However, when inflation target is unobservable or lesscredible, the public updates their perceived inflation target and the information revealed frommarkets to the bank becomes less perfect. The degree of uncertainty facing the bank cruciallydepends on how two-way communication works.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0899.

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Date of creation: Nov 2008
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Handle: RePEc:cep:cepdps:dp0899

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Related research
Keywords: Monetary policy; central bank communication; inflation target;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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  3. Kozicki, Sharon & Tinsley, P. A., 2001. "Term structure views of monetary policy under alternative models of agent expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 149-184, January. [Downloadable!] (restricted)
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  5. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
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  6. Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003 171, Society for Computational Economics.
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  7. George-Marios Angeletos & Alessandro Pavan, 2008. "Policy with Dispersed Information," Carlo Alberto Notebooks 86, Collegio Carlo Alberto. [Downloadable!]
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  8. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May. [Downloadable!] (restricted)
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  9. Spencer Dale & Athanasios Orphanides & Par Osterholm, 2008. "Imperfect Central Bank Communication: Information versus Distraction," Working Papers 2008-1, Central Bank of Cyprus, revised Mar 2008. [Downloadable!]
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  10. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April. [Downloadable!] (restricted)
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  13. Brian Sack, 2000. "Deriving inflation expectations from nominal and inflation-indexed Treasury yields," Finance and Economics Discussion Series 2000-33, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  14. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
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  18. Sharon Kozicki & P.A. Tinsley, 2003. "Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information," CFS Working Paper Series 2003/41, Center for Financial Studies. [Downloadable!]
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  19. Luca Benati, 2008. "Investigating inflation persistence across monetary regimes," Working Paper Series 851, European Central Bank. [Downloadable!]
  20. Orphanides, Athanasios & Williams, John C, 2005. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning and Expectations," CEPR Discussion Papers 4865, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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