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.
Original language | English |
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Pages (from-to) | 235 - 271 |
Number of pages | 37 |
Journal | American Economic Journal. Macroeconomics |
Volume | 2 |
Issue number | 3 |
DOIs | |
Publication status | Published - 2010 |
Externally published | Yes |