Working Paper: CEPR ID: DP17930
Authors: David Byrne; Robert Goodhead; Michael McMahon; Conor Parle
Abstract: Effective central bank communication provides information that the public wants but does not have. Using a new textual methodology to quantify the temporal information in central bank communication, we argue that central bank assessments of the (latent) state of the economy can be the source of the public's information deficit, rather than superior information necessarily. The implication of this is that communication of a single, fixed, reaction function, even if desirable, is likely impossible even if preferences remain fixed over time. Communication of how the central bank is assessing the economy should be emphasised in addition to any forward guidance.
Keywords: communication; monetary policy; temporal information
JEL Codes: E52; E58; C55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank communication (E58) | information deficit (D80) |
| information deficit (D80) | market expectations (D84) |
| market expectations (D84) | asset prices (G19) |
| central bank assessments of the economy (E66) | information deficit (D80) |
| backward-looking data (Y10) | market reactions (G10) |
| central bank communication (E58) | market surprises (D80) |
| temporal dimension of communication (C41) | market yields (G12) |