Communicating Monetary Policy Rules

Sixty-two countries around the world use some form of inflation targeting as their monetary policy framework, though none of these countries express explicit policy rules. In contrast, models of monetary policy typically assume policy is set through a rule such as a Taylor rule or optimal monetary policy formulation. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, tolerance bands, and economic projections. When inflation moves outside the band, the central bank must also specify a time frame over which inflation will return to within the band. We show how communication about time horizons and tolerance bands can uniquely pin down a policy rule, and highlight how different types of communication can be used to convey different policy rules.