Central Bank Communication that Works: Lessons from Lab Experiments
28 Pages Posted: 29 May 2020
Date Written: May 1, 2020
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: Suggested Citation