NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Central Bank Communication and Expectations Stabilization

Stefano Eusepi, Bruce Preston

NBER Working Paper No. 13259
Issued in July 2007
NBER Program(s):   EFG   ME

This paper analyzes the value of communication in the implementation of monetary policy. The central bank is uncertain about the current state of the economy. Households and firms are uncertain about the statistical properties of aggregate variables, including nominal interest rates, and must learn about their dynamics using historical data. Given these uncertainties, when the central bank implements optimal policy, the Taylor principle is not sufficient for macroeconomic stability: for reasonable parameterizations self-fulfilling expectations are possible. To mitigate this instability, three communication strategies are contemplated: i) communicating the precise details of the monetary policy -- that is, the variables and coefficients; ii) communicating only the variables on which monetary policy decisions are conditioned; and iii) communicating the inflation target. The first two strategies restore the Taylor principle as a sufficient condition for stabilizing expectations. In contrast, in economies with persistent shocks, communicating the inflation target fails to protect against expectations driven fluctuations. These results underscore the importance of communicating the systematic component of monetary policy strategy: announcing an inflation target is not enough to stabilize expectations -- one must also announce how this target will be achieved.

download in pdf format
   (394 K)

email paper

This paper is available as PDF (394 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13259

Published:

Users who downloaded this paper also downloaded these:
Aizenman, Binici, and Hutchison w19980 The Transmission of Federal Reserve Tapering News to Emerging Financial Markets
Blinder, Ehrmann, Fratzscher, de Haan, and Jansen w13932 Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence
Woodford w11898 Central Bank Communication and Policy Effectiveness
Lucca and Trebbi w15367 Measuring Central Bank Communication: An Automated Approach with Application to FOMC Statements
Eusepi and Preston w14181 Expectations, Learning and Business Cycle Fluctuations
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us