Central Bank Communication and Expectations Stabilization
AbstractThe value of communication in monetary policy is analyzed in a model in which expectations need not be consistent with central bank policy - and, therefore, unanchored - because agents face difficult forecasting problems. When the central bank implements optimal policy without communication, the Taylor principle is not sufficient for macroeconomic stability: expectations are unanchored and self-fulfilling expectations are possible. To mitigate this instability, three communication strategies are contemplated to ensure consistency between private forecasts and monetary policy strategy: i) communicating the precise details of the monetary policy that is, the variables and coefficients; ii) communicating only the variables on which monetary policy decisions are conditioned; and iii) communicating the inflation target. The first two strategies restore the Taylor principle as a sufficient condition for anchoring expectations. In contrast, in economies with persistent shocks, communicating the inflation target fails to protect against expectations driven fluctuations. These results underscore the importance of communicating the systematic component of monetary policy strategy: announcing an inflation target is not enough to stabilize expectations one must also announce how this target will be achieved.
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Bibliographic InfoPaper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0708-10.
Length: 58 pages
Date of creation: 2007
Date of revision:
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Other versions of this item:
- Stefano Eusepi & Bruce Preston, 2010. "Central Bank Communication and Expectations Stabilization," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 235-71, July.
- Stefano Eusepi & Bruce Preston, 2007. "Central bank communication and expectations stabilization," Proceedings, Federal Reserve Bank of San Francisco.
- Stefano Eusepi & Bruce Preston, 2007. "Central Bank Communication and Expectations Stabilization," NBER Working Papers 13259, National Bureau of Economic Research, Inc.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CBA-2008-02-09 (Central Banking)
- NEP-MAC-2008-02-09 (Macroeconomics)
- NEP-MON-2008-02-09 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bruce Preston, 2003.
"Learning about monetary policy rules when long-horizon expectations matter,"
2003-18, Federal Reserve Bank of Atlanta.
- Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
- Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
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