State-dependent Central Bank Communication with Heterogeneous Beliefs

Herbert Sylvérie

Working papers from Banque de France

Abstract: This paper studies how state-contingent central bank communication can improve welfare when externalities are at play. In the model, a central banker (CB) wants to influence the private sector beliefs, which are heterogeneous, to generate an upward bias in their action. The CB can engender such welfare-improving bias by providing public information, choosing a signalling strategy that is a function of fundamentals. To study this optimal communication strategy, I introduce heterogeneous priors in an otherwise standard Bayesian persuasion model la Gentzkow and Kamenica (2011) and characterize the dependence of optimal disclosure on the heterogeneity of beliefs. I show that heterogeneity matters in two ways: (i) it is optimal to send moderating signals, which implies sending signals with positive error probabilities in both states, and constitutes a non-trivial departure from the homogeneous beliefs case; (ii) higher dispersion in beliefs leads the monetary authority to send signals with lower error probabilities. I apply my framework to a central bank communication problem in which the policy maker communicates about aggregate conditions to influence firms' investment decisions in presence of investment externalities. I empirically validate the model's predictions by showing that the FOMC unemployment rate forecasts are systematically biased in opposite directions in recessions and expansions. Also in line with the model's predictions, the forecast biases are decreasing in the degree of private sector disagreement for each state.

Keywords: Central Bank Communication; Bayesian Persuasion; Expectations; Forecasts (search for similar items in EconPapers)
JEL-codes: D83 E52 E58 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-dem, nep-gth, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... /documents/wp875.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:875

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().