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Marriott Marquis, San Diego Ballroom A
American Economic Association
Central Bank Communication
Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Hyun Song Shin, Bank for International Settlements
Central Banking with Many Voices: The Communications Arms Race
AbstractFederal Reserve policy is set by group decision making. If policy makers care about being predictable (i.e., not choosing a policy that differs from prior policy maker guidance), they compete for the attention of financial markets because those who succeed in moving the markets’ policy expectations gain the upper hand in policy making. This leads to a cacophony of public appearances but also to a “quiet cacophony” of informal communication between policy makers and market newsletters or the news media. Informal communication gets around the FOMC’s internal norm to not comment on the views of colleagues as well as document confidentiality. I provide: (1) A brief review of recent evidence suggesting that informal communication from the Fed has had a large stock market impact. (2) An account of discussions of leaks in FOMC documents. (3) A model of the game theory of the quiet cacophony. Policy makers care about market expectations and are able to distort these by selectively revealing information. With sufficient disagreement, the game resembles a prisoners’ dilemma. All policy makers use informal communication even though it reduces welfare via reduced policy flexibility and harms the Fed’s reputation and the quality of its deliberations. I discuss approaches to improve the current undesirable state of affairs.
Policy Announcement Design
AbstractWe study the general problem of information design for a policymaker - a central bank - that communicates its private information (the "state") to the public. We show that it is optimal for the policymaker to partition the state space into a finite number of "clusters” and to communicate to the public to which cluster the state belongs. Optimal communication is more precise when the policymaker's beliefs conform with prior public expectations, but is more vague in case of divergence. We characterize the policymaker's trade-offs via a novel object - the information relevance matrix - and label its eigenvectors as principal information components (PICs). PICs with the highest eigenvalues determine the dimensions of information with the highest welfare sensitivity and, hence, are the ones that the policymaker should be most precise about.
The Long-Run Information Effect of Central Bank Communication
AbstractWhy do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England's Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.
University of Rochester
Harvard Business School
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E4 - Money and Interest Rates