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Fed Speak on Main Street: Central Bank Communication and Household Expectations

39 Pages Posted: 31 Aug 2016 Last revised: 24 May 2017

Carola Binder

Haverford College - Department of Economics

Date Written: March 8, 2016

Abstract

Central banks emphasize the use of communication as a tool of monetary policy. As central banks increasingly recognize that low public informedness limits their ability to communicate with the general public, several have begun to explicitly tailor their communication strategies for a broader audience. Most research focuses on central bank communication with financial markets, but several recent strands of literature address aspects of communication with households. I survey the literature addressing the rationales and efficacy of central bank communication with households, supplementing this with new evidence from an assortment of consumer survey data. I draw from the literature on rational inattention, financial literacy, and political communication to suggest explanations for limited household receptiveness to central bank communications. Finally, I focus on one specific aim of central bank communication, which is to anchor inflation expectations. Previous literature finds that the announcement of an explicit inflation target helps anchor expectations among financial market participants. Using U.S. consumer survey data, I show that consumers’ expectations are imperfectly anchored and that the anchoring of more informed consumers’ expectations increased more than the anchoring of less informed consumers’ expectations following the Fed’s announcement of a 2% inflation target.

Keywords: Monetary Policy, Inflation Expectations, Communication Strategy, Consumers, Rational Inattention, Transparency

JEL Classification: D12, D83, D84, E31, E52, E58

Suggested Citation

Binder, Carola, Fed Speak on Main Street: Central Bank Communication and Household Expectations (March 8, 2016). Journal of Macroeconomics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2789903 or http://dx.doi.org/10.2139/ssrn.2789903

Carola Binder (Contact Author)

Haverford College - Department of Economics ( email )

Haverford, CT 19041
United States

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