Central Bank Communication and Expectations Stabilization
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)
Volume (Year): 2 (2010)
Issue (Month): 3 (July)
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- Stefano Eusepi & Bruce Preston, 2007.
"Central Bank Communication and Expectations Stabilization,"
NBER Working Papers
13259, National Bureau of Economic Research, Inc.
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343, Federal Reserve Bank of New York.
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- Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," FRB Atlanta Working Paper 2003-18, Federal Reserve Bank of Atlanta.
- Ferrero, Giuseppe, 2007. "Monetary policy, learning and the speed of convergence," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3006-3041, September.
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