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Central bank's two-way communication with the public and inflation dynamics

  • Kosuke Aoki
  • Takeshi Kimura

Using a model of island economy where financial markets aggregate dispersed information of the public, we analyze how two-way communication between the central bank and the public affects inflation dynamics. When inflation target is observable and credible to the public, markets provide the bank with information about the aggregate state of the economy, and hence the bank can stabilize inflation. However, when inflation target is unobservable or less credible, the public updates their perceived inflation target and the information revealed from markets to the bank becomes less perfect. The degree of uncertainty facing the bank crucially depends on how two-way communication works.

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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 25483.

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Length: 42 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:ehl:lserod:25483
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