When Can Central Banks Anchor Expectations? Policy communication and controllability

Nicola Acocella, Giovanni Di Bartolomeo () and Andrew Hughes Hallett ()

No 7078, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Rational expectations are often used as a strong argument against policy activism, as they may undermine or neutralize the policymaker’s actions. Although this sometimes happens, rational expectations do not always imply policy invariance or ineffectiveness. In fact, in certain circumstances rational expectations can enhance our power to control an economy over time. In those cases, policy announcements, properly communicated, can be used to extend the impact of conventional policy instruments. In this paper we present a general forward-looking policy framework and use it to provide a formal justification for attempting to anchor expectations, and as a possible justification for publishing interest rate forecasts or tax rate projections. This approach allows us to test when policymakers can and cannot expect to be able to manage expectations.

Keywords: controllability; fiscal policy; monetary policy; policy neutrality; Rational expectations (search for similar items in EconPapers)
JEL-codes: C61 C62 E52 E61 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-12
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