Talking Over Time ‐ Dynamic Central Bank Communication

Abstract

This paper studies the optimal dynamic communication strategy of central banks using a Bayesian persuasion game framework. In a dynamic environment, financial market participants and the general public have misaligned interests because the present and future have different relevance in their optimization problems, leading to a novel trade‐off for the monetary authority. Compared to the static benchmark, I show that the central bank (CB's) optimal dynamic communication policy should put a higher weight on talking about the present state than the future. In addition, the CB should strategically send more noisy signals than in the static benchmark.

Monetary Communication Rules

“…This question lies at the heart of the global games literature à la Morris and Shin (2002), Angeletos and Pavan (2007), Amador and Weill (2010) or Angeletos and La'O (2013). Recent papers that look at various facets of optimal communication design, such as transparency or optimal dynamic communication include Ou et al (2022) and Gáti (2022).…”

The Signaling Effects of Fiscal Announcements

“…Our analysis is chiefly related to studies that investigate the signaling effects in monetary policy. In this realm of research, Vickers (1986), Romer and Romer (2000), Campbell et al (2012), Campbell et al (2017), Melosi (2017), D'Amico andKing (2013), Nakamura and Steinsson (2018), Cieslak and Schrimpf (2019), Jarocinski and Karadi (2020), Andrade and Ferroni (2021), Miranda-Agrippino and Ricco (2021) and Gáti (2021) show that announcements about monetary policy provide powerful signals on the future economic conditions that influence the expectations of market participants. A recent paper by Bauer and Swanson (2020) challenges the conclusions of these studies.…”