Louder than Rates. : the Systematic Nature of Central Bank Communication

Résumé

Do central banks decide systematically how much to communicate when explaining their policy decisions? Using all U.S. Federal Open Market Committee policy statements since 1994, we measure communication effort through the change in Shannon entropy and estimate a forward-looking communication rule. We find that communication is systematic: the Federal Reserve communicates more when inflation is expected to exceed target and output is expected to fall below potential. This finding is robust across a variety of sensitivity exercises. We then develop a New Keynesian model with imperfect information showing that systematic communication acts as a second policy instrument, stabilizing expectations and complementing interest-rate policy, especially at the zero lower bound.