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  3. American Economic Journal: Macroeconomics
  4. July 2010
  5. Central Bank Communication and Expectations Stabilization

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Central Bank Communication and Expectations Stabilization

  • Stefano Eusepi
  • Bruce Preston
American Economic Journal: Macroeconomics
vol. 2, no. 3, July 2010
(pp. 235–71)
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Abstract

The value of communication is analyzed in a model in which agents' expectations need not be consistent with central bank policy. Without communication, the Taylor principle is not sufficient for macroeconomic stability: divergent learning dynamics are possible. Three communication strategies are contemplated to ensure consistency between private forecasts and monetary policy strategy: communicating the precise details of policy; communicating only the variables on which policy decisions are conditioned; and communicating the inflation target. The former strategies restore the Taylor principle as a sufficient condition for anchoring expectations. The latter strategy, in general, fails to protect against expectations-driven fluctuations. (JEL E32, E43, E52, E58)

Citation

Eusepi, Stefano, and Bruce Preston. 2010. "Central Bank Communication and Expectations Stabilization." American Economic Journal: Macroeconomics, 2 (3): 235–71. DOI: 10.1257/mac.2.3.235

Additional Materials

JEL Classification

  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
  • E58 Central Banks and Their Policies
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