Controlling inflation with central bank news

Nikolaos Kokonas, Michalis Rousakis and Efthymios Smyrniotis

European Economic Review, 2025, vol. 180, issue C

Abstract: What determines the stochastic path of inflation? We study this question in a monetary economy featuring imperfect information and rational expectations. The central bank targets inflation and releases noisy information about future non-monetary fundamentals through its non-systematic component. We show that real interest rate increases following such information releases lead the private sector to revise upward its expectations of future output — an outcome arising from “Fed information effects”. Through this channel, central bank communication influences market expectations about the economic outlook, adding further constraints to the equilibrium and ultimately determining the stochastic path of inflation. We propose a novel role for Fed information effects: their ability to serve as a mechanism for equilibrium selection.

Keywords: Determinacy; Monetary policy; Information (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125002260

DOI: 10.1016/j.euroecorev.2025.105176

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