When can central banks anchor expectations? Policy communication and controllability (original) (raw)

The Role of Expectations in Monetary Policy

International Finance, 2006

Recent literature on monetary policy has emphasised the role of expectations and the merits of tying them down through credible commitment. However, although always in favour of reaping the bene…ts of having committed, Central Banks worry about the fact that in real time, it is not always easy to assume that they are in such a position. Decisions need to be taken then, under the assumption of predetermined expectations. We argue that in these circumstances, the provision of clear in ‡ation objectives helps agents understand Central Bank objectives better and is thus bene…cial to all.

Expectations and the Central Banker: Making Decisions the Market Expects to See? [revised]

RePEc: Research Papers in Economics, 2004

This paper develops a simple model to examine conditions under which a monetary policymaking authority is tempted to "follow the market." In doing so, we explore the implications of increased market-consensus on the practice of monetary policy and show that inefficiency in policymaking is most likely precisely when there is a very high consensus that economic fundamentals are weak or strong. In addition, our results also shed light on (i) why interest rates may not be high enough even when the central bank's information suggests a rise in asset prices may be due to 'bubble' shock; (ii) why a central banker may be reluctant to adopt a loose monetary policy even when investors seem to be very pessimistic about the path of future output; and (iii) why, contrary to conventional models, we sometimes observe an upward revision of private sector's forecasts of inflation when the central bank tightens its monetary policy. The results have implications for transparency of monetary policy.

Expectations and the Central Banker: Making Decisions the Market Expects to See?

SSRN Electronic Journal, 2004

This paper develops a simple model to examine conditions under which a monetary policymaking authority is tempted to "follow the market." In doing so, we explore the implications of increased market-consensus on the practice of monetary policy and show that inefficiency in policymaking is most likely precisely when there is a very high consensus that economic fundamentals are weak or strong. In addition, our results also shed light on (i) why interest rates may not be high enough even when the central bank's information suggests a rise in asset prices may be due to 'bubble' shock; (ii) why a central banker may be reluctant to adopt a loose monetary policy even when investors seem to be very pessimistic about the path of future output; and (iii) why, contrary to conventional models, we sometimes observe an upward revision of private sector's forecasts of inflation when the central bank tightens its monetary policy. The results have implications for transparency of monetary policy.

‘Matching ’ Expectations to the Target: The Role of Communication in Monetary Policy∗

2015

We derive the conditions under which a simple form of communication may prove beneficial to the public in terms of helping them form ex-pectations. By consequence this also helps the Central Bank achieve its inflation objective. The example we apply refers to the announcement of an explicit inflation objective. We argue that monetary policy is an infor-mation game, implying that agents form expectations based on all infor-mation available to them but are also subject to the existing information noise. We argue that the communication of an explicit inflation target can potentially provide agents with a focal point. A necessary condition how-ever for this focal point element to emerge is that the target announced is sufficiently credible. We then show how agents learn to evaluate this target based on the Central Bank’s past performance. We identify credi-bility with expectations being tied to the target, and successful monetary policy with inflation being within a range of known value...

Central Bank Communication: Different Strategies, Same Effectiveness?

The paper assesses the communication strategies of the Federal Reserve, the Bank of England and the European Central Bank and their effectiveness. Based on the content, timing and consistency of statements by the policy committees and its individual members as well as the voting behaviour, we argue that the three central banks are following fundamentally different communication strategies, with the Federal Reserve pursuing an approach that stresses the individual accountability of FOMC members, whereas the European Central Bank has been pursuing a more collegiate, and the Bank of England an intermediate approach. The central finding is that the predictability of policy decisions and the responsiveness of financial markets are equally good for the Federal Reserve and the ECB, though there are important differences in the type of communication that financial markets react to. This suggests that there may not be a single best approach to central bank communication and that the most effective way of communication depends on the circumstances and the environment a central bank operates in.

Central Bank Credibility Under Inferential Expectations

The theory of inferential expectations,states that “economic agents hold beliefs that are subject to falsification by new information, in much the same,way that they are in conventional,statistical hypothesis,testing.” We outline the role expectations,play in current monetary,economic,theory by Corresponding author. Contact details: Crawford School of Economics and Government, Australian National University, Canberra ACT 0200, Australia; Tel: +61-2-61255540; Fax: +61-2-61255570; Email: timo.henckel@anu.edu.au. 1 incorporating,inferential expectations,into the Barro-Gordon model,(1983) of time inconsistency. In a simple version of the model, the time consistent inflation target range shrinks as the duration of cheating increases, where time is a function of agents’ test size, α. In the second version of the model both magnitude,and time affect the monetary,authority’s incentive to cheat. The model produces,two key insights: i) monetary,authorities may,cheat for some,time without,bein...

Over-reaction to Policy Signals, and Central Bank Optimal Communication Policy

This paper reviews the theoretical arguments, counter arguments regarding central bank optimal communication policy in an environment with imperfect common knowledge and strategic complementarity. More specifically, the paper discusses the environment in which full transparency is no longer necessarily the superior strategy. Uncertainty about the underlying economic state in the presence of dispersed information is the basis for the emergence of imperfect common knowledge. These issues are further discussed in an augmented Lucas-island model. Full policy transparency in this setting leads to overreliance to CB public policy signals resulting in the expectations coordination away from fundamentals-dubbed as over-reaction to the central bank announcements. Optimal communication policy in this context entails strategies to limit overreaction via partial transparency or partial publicity.

Central bank communication and monetary policy: A survey of theory and evidence

2008

Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication --mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy. model could be closed by appending a central bank reaction function (e.g., a "Taylor rule"):

„Formalizing the future: How central banks set out to govern expectations but ended up (en-)trapped in indicators“

Historical Social Research / Historische Sozialforschung, 2019

Modern ‘inflation targeting’ monetary policy has been one of the prototypes of future-oriented modes of social coordination which in recent years have captured the sociological imagination. Modern central banking is commonly presented as achieving greater efficacy by directly managing economic expectations, in particular when contrasted with the previous heavy-handed, “hydraulic” transmission of policy objectives through systems of economic aggregates. Such empirical claims are mirrored in the theoretical distinction drawn by sociologists between the openness and efficacy of future-oriented coordination of expectations, and the more rigid coordination achieved through formal organizing and formalization. This paper uses the case of the US Federal Reserve’s (Fed) transition to inflation targeting in the 1980s to show how the precision and flexibility of social coordination through expectations in fact relies on extensive formalization and rigid proceduralization. I show that the tightly coupled control relation on which inflation targeting rests is not possible without the constitutive exclusion of other modes of representing and intervening the economy achieved by this formalization. However, the price for the robust and precise reactivity that modern central banking has constructed between key indicators of inflation expectations and the interest rate set by monetary policy, is a comprehensive procedural dis-embedding of monetary policy from the structure of economic activities whose path into the future it is meant to govern. The paper concludes that in order to better understand the conditions under which future-oriented modes of coordination fail or succeed, we need to study more closely the formalization of social relations on which they are founded.