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Imperfect Central Bank Communication: Information versus Distraction

  • Spencer Dale

    (Bank of England)

  • Athanasios Orphanides

    (Central Bank of Cyprus)

  • Pär Österholm

    (Sveriges Riksbank)

Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. If the public is able to assess accurately the quality of the imperfect information communicated by a central bank, such communication can inform and improve the public’s decisions and expectations. But if not, communicating imperfect information has the potential to mislead and distract. The risk that imperfect communication may detract from the public’s understanding should be considered in the context of a central bank’s communications strategy. The risk of distraction means the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public’s understanding to the extent that it “crowds out” a role for communicating imperfect information.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 7 (2011)
Issue (Month): 2 (June)
Pages: 3-39

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Handle: RePEc:ijc:ijcjou:y:2011:q:2:a:1
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  1. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  2. repec:fip:fedgsq:y:2007:i:jul10 is not listed on IDEAS
  3. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Working Paper Series 2002-04, Federal Reserve Bank of San Francisco.
  4. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  5. Michael Woodford, 2005. "Central Bank Communication and Policy Effectiveness," NBER Working Papers 11898, National Bureau of Economic Research, Inc.
  6. Sibert, Anne, 2006. "Is Central Bank Transparency Desirable?," CEPR Discussion Papers 5641, C.E.P.R. Discussion Papers.
  7. Winkler, Bernhard, 2000. "Which kind of transparency? On the need for clarity in monetary policy-making," Working Paper Series 0026, European Central Bank.
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