ECB Communication as a Stabilization and Coordination Device: Evidence from Ex-Ante Inflation Uncertainty

47 Pages Posted: 7 Aug 2021

Date Written: August, 2021

Abstract

This paper investigates the impact of ECB communication of its assessment of the economic outlook on ex-ante inflation uncertainty and sheds light on how central bank information shocks operate. The paper finds that ECB communication of new outlook information not only reduces professional forecasters’ disagreement (i.e., the cross-sectional dispersion of their average point forecasts of inflation) but also makes forecasters less uncertain about their own beliefs, thus reducing ex-ante average individual uncertainty. By combining and exploiting these types of ex-ante inflation uncertainty, results suggest that central bank information acts as a “coordination device” able to influence opinions and actions. Most importantly, it generates a “stabilizer effect” by substantially decreasing the dispersion among the inflation point forecasts, which converge towards their unconditional aggregate mean. The results of this paper not only help to explain the impact of new central bank information, but they are also useful for policymakers to define a communication strategy that attenuates ex-ante inflation uncertainty in the most effective way.

JEL Classification: D83, E52, E58, E65, G14

Suggested Citation

Fernandes, Cecilia Melo, ECB Communication as a Stabilization and Coordination Device: Evidence from Ex-Ante Inflation Uncertainty (August, 2021). ECB Working Paper No. 2021/2582, Available at SSRN: https://ssrn.com/abstract=3900851 or http://dx.doi.org/10.2139/ssrn.3900851

Cecilia Melo Fernandes (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NE 1018 WB
Netherlands

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