Central Bank Communication and Expectations Stabilization

Stefano Eusepi and Bruce Preston

American Economic Journal: Macroeconomics, 2010, vol. 2, issue 3, 235-71

Abstract: The value of communication is analyzed in a model in which agents' expectations need not be consistent with central bank policy. Without communication, the Taylor principle is not sufficient for macroeconomic stability: divergent learning dynamics are possible. Three communication strategies are contemplated to ensure consistency between private forecasts and monetary policy strategy: communicating the precise details of policy; communicating only the variables on which policy decisions are conditioned; and communicating the inflation target. The former strategies restore the Taylor principle as a sufficient condition for anchoring expectations. The latter strategy, in general, fails to protect against expectations-driven fluctuations. (JEL E32, E43, E52, E58)

JEL-codes: E32 E43 E52 E58 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/mac.2.3.235
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Citations: View citations in EconPapers (129)

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Related works:
Journal Article: Central bank communication and expectations stabilization (2007)
Working Paper: Central Bank Communication and Expectations Stabilization (2007)
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