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Central Bank Communication and Interest Rate Rules

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  • M. Hoeberichts

Abstract

The central bank's influence on private sector expectations is an important channel of monetary policy. Therefore, it is important for a central bank to pay attention to its communication. It should also be aware that the public might not be willing or able to process all the information that the central bank provides. In this paper, we explicitly take the public's information processing constraint into account when we design the interest rate rule. We find that if inflationary expectations are important relative to the output gap in determining current inflation, the central bank should be less activist when the public has a tighter information processing constraint.

Suggested Citation

  • M. Hoeberichts, 2003. "Central Bank Communication and Interest Rate Rules," WO Research Memoranda (discontinued) 729, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:729
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    File URL: https://www.dnb.nl/binaries/wo0729_tcm46-146020.pdf
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    References listed on IDEAS

    as
    1. Jeffery D. Amato & Stephen Morris & Hyun Song Shin, 2002. "Communication and Monetary Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 18(4), pages 495-503.
    2. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    3. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
    4. Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
    5. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    6. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    interest rate rules; information processing; expectation formation; central bank;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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