Uncertainty and the signaling channel of monetary policy

A growing body of evidence supports the view that monetary policy actions communicate information about the state of the economy to an imperfectly informed public. Therefore, it is important for policymakers to understand the implications of this signaling channel for optimal policy as well as for the value of central bank communication. This paper studies, both theoretically and empirically, a setting where such a monetary policy signaling channel arises because the policymaker has more information about economic fundamentals than private agents have. In this environment, policy actions taken in response to fundamentals provide a signal to rational private agents about those fundamentals.