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Central Bank Communication and Expectations Stabilization
| Content Provider | Semantic Scholar |
|---|---|
| Author | Eusepi, Stefano |
| Copyright Year | 2007 |
| Abstract | This paper analyzes the value of communication in the implementation of monetary policy. The central bank is uncertain about the current state of the economy. Households and rms are uncertain about the statistical properties of aggregate variables, including nominal interest rates, and must learn about their dynamics using historical data. Given these uncertainties, when the central bank implements optimal policy, the Taylor principle is not su¢ cient for macroeconomic stability: for reasonable parameterizations self-ful lling expectations are possible. To mitigate this instability, three communication strategies are contemplated: i) communicating the precise details of the monetary policy that is, the variables and coe¢ cients; ii) communicating only the variables on which monetary policy decisions are conditioned; and iii) communicating the ination target. The rst two strategies restore the Taylor principle as a su¢ cient condition for stabilizing expectations. In contrast, in economies with persistent shocks, communicating the ination target fails to protect against expectations driven uctuations. These results underscore the importance of communicating the systematic component of monetary policy strategy: announcing an ination target is not enough to stabilize expectations one must also announce how this target will be achieved. The authors thank seminar participants at the Bank of Portugal, Belgium National Bank, Brown University, the FRB of San Francisco Conference on Monetary Policy, Transparency, and Credibility, FRB of New York, the FRB of St Louis, ECARES Universite Libre de Bruxelles and the 2007 Spring Meeting of the NBER Monetary Economics Group, and particularly Alejandro Justiniano and our discussants Michael Ehrmann, Athanasios Orphanides and Chris Sims for detailed comments and discussions. The views expressed in the paper are those of the authors and are not necessarily reective of views at the Federal Reserve Bank of New York or the Federal Reserve System. The usual caveat applies. yDepartment of Economics, Columbia University, 420 West 118th St. New York NY 10027. E-mail: bp2121@columbia.edu |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://www.frbsf.org/economic-research/files/eusepi_preston.pdf |
| Alternate Webpage(s) | https://www.nbb.be/doc/ts/enterprise/activities/seminars/presentatie_bruce_preston.pdf |
| Alternate Webpage(s) | http://www.frbsf.org/economic-research/events/2007/march/monetary-policy-transparency-credibility/eusepi_preston.pdf |
| Alternate Webpage(s) | http://wwwdocs.fce.unsw.edu.au/economics/news/VisitorSeminar/communication_preston.pdf |
| Alternate Webpage(s) | http://users.monash.edu.au/~brucep/communication.pdf |
| Alternate Webpage(s) | http://www.frbsf.org/economic-research/publications/economic-research/conferences/0703/eusepi_preston.pdf |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Aggregate data Aggregate function Appendix Arikaree language Cautionary Warning Columbia (supercomputer) Control theory Converge Email Emoticon Estimated Glycyrrhiza macedonica Holographic principle Instability Jacobian matrix and determinant Kind of quantity - Equilibrium License Money No-communication theorem Norepinephrine Population Parameter Projections and Predictions Promotion (action) Radiographic imaging procedure Recursion (computer science) Self-stabilization Shock Steady state The Matrix Unstable Medical Device Problem |
| Content Type | Text |
| Resource Type | Article |
