FCI-Plot: Central Bank Communication Through Financial Conditions

Ricardo Caballero and Alp Simsek

No 20680, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We develop a model of central bank communication where market participants' uncertainty about desired financial conditions creates misunderstandings ("tantrums") and amplifies the impact of financial noise on asset prices and economic activity. We show that directly communicating the expected financial conditions path (FCI-plot) eliminates tantrums and recruits arbitrageurs to insulate conditions from noise, while communicating expected interest rates alone fails to achieve these benefits. We demonstrate that scenario-based FCI-plot communication enhances recruitment when participants disagree with the central bank regarding scenario probabilities. This enables an "agree-to-disagree" equilibrium where markets help implement central bank objectives despite differing views.

Keywords: Financial conditions; Monetary policy; Belief disagreements; Forward guidance; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: E12 E32 E44 E52 E58 G10 (search for similar items in EconPapers)
Date: 2025-09
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