Working Paper: CEPR ID: DP17784
Authors: Michael Ehrmann; Dimitris Georgarakos; Geoff Kenny
Abstract: We show that the announcement of the ECB’s Strategy Review and the revision of its inflation target in summer 2021 went largely unnoticed by the wider public. Although it is hard to reach out to this group, we find evidence that communicating key elements of the ECB’s new monetary policy strategy can enhance the perceived credibility that price stability will be maintained in the medium-term. Randomised information treatments in the new Consumer Expectations Survey reveal that providing an explanation of the stabilising role of monetary policy under the symmetric inflation target has the strongest positive impact on credibility among survey respondents. It also boosts credibility among those with low financial literacy and generates more persistent credibility gains, even in an environment characterised by higher inflation. Adding considerations that consumers can easily relate to, such as commitments to take better account of climate risks and a promise to better capture housing costs in inflation measurement, does not alter the credibility gain.
Keywords: Monetary Policy; Central Bank Communication; Credibility; Inflation Expectations; Financial Literacy; Randomised Control Trial; Consumer Expectations Survey
JEL Codes: E52; E58; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Communication of the ECB's new symmetric inflation target (E52) | Perceived credibility of price stability (E31) |
| Baseline explanation of the ECB's symmetric inflation target (E52) | Perceived credibility of price stability (E31) |
| Additional explanations regarding the stabilizing role of monetary policy (E63) | Perceived credibility of price stability (E31) |
| Low financial literacy (G53) | Effectiveness of communication in enhancing credibility (D83) |
| References to climate change and housing costs (Q54) | Perceived credibility of price stability (E31) |
| Effective communication (L96) | Credibility gains in a high-inflation environment (E31) |