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American Economic Journal: Macroeconomics: Vol. 2 No. 3 (July 2010)

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Central Bank Communication and Expectations Stabilization

Article 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

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)

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Authors

Eusepi, Stefano (Federal Reserve Bank of New York)
Preston, Bruce (Columbia U and Centre of Applied Macroeconomic Analysis, Australian National U)

JEL Classifications

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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