Central Bank Communication that Works: Lessons from Lab Experiments

28 Pages Posted: 29 May 2020

See all articles by Oleksiy Kryvtsov

Oleksiy Kryvtsov

Bank of Canada

Luba Petersen

Simon Fraser University (SFU) - Department of Economics

Date Written: May 1, 2020

Abstract

The causal effects of central bank communication on economic expectations and their underlying mechanisms are tested in controlled laboratory experiments. We find that central bank communication has a stabilizing effect on individual and aggregate outcomes, and the size of the effect varies with the type of communication. Announcing past interest rate changes has the largest effect, reducing volatility of individual price and expenditure forecasts by one-quarter and four-fifths, respectively, and cutting a quarter of macroeconomic volatility. Forward-looking announcements have less effect on individual forecasts, especially if they do not clarify the timing of future policy changes. There is little evidence that central bank communication transmits via its influence on forecasters' ability to predict future nominal interest rates. Rather, communication is effective via simple and relatable backward-looking announcements that exert strong influence on less-accurate forecasters.

Keywords: Expectations, Monetary Policy, Inflation, Experimental Macroeconomics

JEL Classification: C9, D84, E3, E52

Suggested Citation

Kryvtsov, Oleksiy and Petersen, Luba, Central Bank Communication that Works: Lessons from Lab Experiments (May 1, 2020). Journal of Monetary Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3590866 or http://dx.doi.org/10.2139/ssrn.3590866

Oleksiy Kryvtsov

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Luba Petersen (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

HOME PAGE: http://www.sfu.ca/~lubap

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