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Communication of Central Bank Thinking and Inflation Dynamics

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  • Man-Keung Tang
  • Xiangrong Yu

Abstract

This paper studies the role of central bank communication of its economic assessment in shaping inflation dynamics. Imperfect information about the central bank''s assessment - or the basis for monetary policy decisions - could complicate the private sector''s learning about its policy response function. We show how clear central bank communication, which facilitates agents'' understanding of policy reasoning, could bring about less volatile inflation and interest rate dynamics, and afford the authorities with greater policy flexibility. We then estimate a simple monetary model to fit the Mexican economy, and use the suggested paramters to illustrate the model''s quantitative implications in scenarios where the timing, nature and persistence of shocks are uncertain.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/209.

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Length: 32
Date of creation: 01 Aug 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/209

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Keywords: Monetary policy; Central bank role; Economic models; Inflation targeting; inflation; central bank; monetary economics; inflation dynamics; monetary model; rational expectations; monetary fund; monetary policy decisions; optimal monetary policy; monetary policy rules; money supply; inflationary pressure; inflation deviation; price stability; inflation target; monetary policy rule; increase in inflation; inflation forecasts; monetary aggregate; rise in inflation; monetary policy regime; high inflation; financial stability; real interest rate; lower inflation; monetary system; price level; change in inflation; monetary framework; inflation objective; inflation-targeting; inflation targeting framework; steady-state inflation; nominal interest rate; monetary targeting; increase in interest rates; monetary reaction function; inflation rate; reduction in inflation; monetary regimes; monetary policy transparency; monetary stance;

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