State-dependent Central Bank Communication with Heterogeneous Beliefs

This paper studies how state-contingent central bank communication can improve welfare when externalities are at play. In the model, a central banker (CB) wants to influence the private sector beliefs, which are heterogeneous, to generate an upward bias in their action. The CB can engender such welfare-improving bias by providing public information, choosing a signalling strategy that is a function of fundamentals. To study this optimal communication strategy, I introduce heterogeneous priors in an otherwise standard Bayesian persuasion model la Gentzkow and Kamenica (2011) and characterize the dependence of optimal disclosure on the heterogeneity of beliefs. I show that heterogeneity matters in two ways: (i) it is optimal to send moderating signals, which implies sending signals with positive error probabilities in both states, and constitutes a non-trivial departure from the homogeneous beliefs case; (ii) higher dispersion in beliefs leads the monetary authority to send signals with lower error probabilities. I apply my framework to a central bank communication problem in which the policy maker communicates about aggregate conditions to influence firms' investment decisions in presence of investment externalities. I empirically validate the model's predictions by showing that the FOMC unemployment rate forecasts are systematically biased in opposite directions in recessions and expansions. Also in line with the model's predictions, the forecast biases are decreasing in the degree of private sector disagreement for each state.