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On the optimal precision of central bank communication

Author

Listed:
  • Aeimit Lakdawala

    (Wake Forest University)

  • Jinyoung Seo

    (Wake Forest University)

  • Myungkyu Shim

    (Yonsei)

Abstract

How precisely should central banks communicate about the future policy rate path? We study this question in an incomplete information model where the central bank chooses the precision of its communication. The key feature is an endogenous cost of precision: clearer communication makes financial markets respond more strongly to policy path news. A simple overlapping generations framework links this financial market volatility to volatility in the real economy that central banks care about. The benefit of precision is that it helps agents make more informed decisions, and we show how the central bank optimally balances the two. High-frequency monetary policy announcement data provide evidence consistent with the model’s amplification mechanism.

Suggested Citation

  • Aeimit Lakdawala & Jinyoung Seo & Myungkyu Shim, 2026. "On the optimal precision of central bank communication," Working Papers 138, Wake Forest University, Economics Department.
    • Handle: RePEc:ris:wfuewp:023050
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    Keywords

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    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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