On the optimal precision of central bank communication

Aeimit Lakdawala, Jinyoung Seo and Myungkyu Shim
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Aeimit Lakdawala: Wake Forest University
Jinyoung Seo: Wake Forest University
Myungkyu Shim: Yonsei

No 138, Working Papers from Wake Forest University, Economics Department

Abstract: How precisely should central banks communicate about the future policy rate path? We study this question in an incomplete information model where the central bank chooses the precision of its communication. The key feature is an endogenous cost of precision: clearer communication makes financial markets respond more strongly to policy path news. A simple overlapping generations framework links this financial market volatility to volatility in the real economy that central banks care about. The benefit of precision is that it helps agents make more informed decisions, and we show how the central bank optimally balances the two. High-frequency monetary policy announcement data provide evidence consistent with the model’s amplification mechanism.

Keywords: central bank communication; forward guidance; communication precision; monetary policy uncertainty; financial market volatility (search for similar items in EconPapers)
JEL-codes: D83 E43 E44 E52 E58 (search for similar items in EconPapers)
Pages: 45
Date: 2026-06
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Persistent link: https://EconPapers.repec.org/RePEc:ris:wfuewp:023050

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