Beyond "Looking Through": Monetary Policy Responses and Communication Under Supply-Driven Inflation

Using a controlled macroeconomic experiment, we compare monetary policy rules that differ in how much they look through inflation: a Lean-Against policy that responds strongly to inflation and a Look-Through policy that responds less strongly. We combine each rule with communication protocols that vary the information the central bank releases about its policy response: restricted qualitative information, detailed quantitative information, and detailed quantitative information combined with inflation and output projections. Midway through each session, we raise the persistence of the cost-push shock. Looking through large, persistent shocks raises and prolongs inflation and increases the risk that inflation expectations unanchoring, while responding with tighter policy curbs inflation sooner. Communication matters mainly through projections. Adding detailed quantitative information to qualitative statements has little effect on output gaps, inflation, expectations or forecast errors. Communicating projections reduces inflation and output losses, anchors inflation expectations and lowers forecast errors. Under Look-Through, projections anchor inflation expectations and reduce inflation after the increase in supply shock persistence. Looking through supply-shock-induced inflation is only advisable when the central bank can communicate credible and focal projections to guide expectations.