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Central Bank Communication and Expectations Stabilization

Author

Listed:
  • Stefano Eusepi
  • Bruce Preston

Abstract

The value of communication is analyzed in a model in which agents' expectations need not be consistent with central bank policy. Without communication, the Taylor principle is not sufficient for macroeconomic stability: divergent learning dynamics are possible. Three communication strategies are contemplated to ensure consistency between private forecasts and monetary policy strategy: communicating the precise details of policy; communicating only the variables on which policy decisions are conditioned; and communicating the inflation target. The former strategies restore the Taylor principle as a sufficient condition for anchoring expectations. The latter strategy, in general, fails to protect against expectations-driven fluctuations. (JEL E32, E43, E52, E58)

Suggested Citation

  • Stefano Eusepi & Bruce Preston, 2010. "Central Bank Communication and Expectations Stabilization," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 235-271, July.
    • Handle: RePEc:aea:aejmac:v:2:y:2010:i:3:p:235-71
    Note: DOI: 10.1257/mac.2.3.235
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • 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

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