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Controlling inflation with central bank news

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  • Kokonas, Nikolaos
  • Rousakis, Michalis
  • Smyrniotis, Efthymios

Abstract

What determines the stochastic path of inflation? We study this question in a monetary economy featuring imperfect information and rational expectations. The central bank targets inflation and releases noisy information about future non-monetary fundamentals through its non-systematic component. We show that real interest rate increases following such information releases lead the private sector to revise upward its expectations of future output — an outcome arising from “Fed information effects”. Through this channel, central bank communication influences market expectations about the economic outlook, adding further constraints to the equilibrium and ultimately determining the stochastic path of inflation. We propose a novel role for Fed information effects: their ability to serve as a mechanism for equilibrium selection.

Suggested Citation

  • Kokonas, Nikolaos & Rousakis, Michalis & Smyrniotis, Efthymios, 2025. "Controlling inflation with central bank news," European Economic Review, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125002260
    DOI: 10.1016/j.euroecorev.2025.105176
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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