Messaging to a public with its own view on central bank confidence

Laura Gáti and Amy Handlan

Research Bulletin, 2026, vol. 142

Abstract: We model central bank communication when there is disagreement between the markets and the central bank about the central bank’s confidence surrounding its point forecast. We show that such a disagreement leads the markets to misunderstand a given announcement, so that the markets either over- or underreact to the bank’s announcement. Communicating only a part of the central bank’s information set is a way to correct the markets’ over- or underreaction. The model also produces predictions for how the central bank’s statement drafting process can take the disagreement about uncertainty into account, which we find support for in data on Federal Reserve System communication. JEL Classification: E52, E58, C49

Keywords: cheap talk; Communication; forward guidance; reputation; text analysis (search for similar items in EconPapers)
Date: 2026-04
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