Rules versus Discretion in Central Bank Communication

We study Central Bank communication in a coordination environment. We show that anything goes when the Central Bank cannot commit to a communication policy: both its most and least preferred allocations can be supported in equilibrium, and so can anything in between. We find that the ability to commit to a policy does not eliminate multiplicity and, in particular, does not necessarily implement the Central Bank's most preferred allocation. Under commitment, however, the Central Bank can avoid the least desirable outcomes and assure an intermediate payoff. We show that the Central Bank chooses an information structure with only two messages that leads to perfect coordination among private agents.