Central Bank Strategic Communication and the Dynamics of Reputation

Abstract

Why, when and how should a central bank (mis)report private information? This paper studies the incentives and the ability of a central bank to stabilize the economy through strategically distorted announcements. Three messages stand out. First, strategic communication designed to mitigate dispersion costs from sector specific shocks complements standard policy interventions in stabilizing the economy. Second, communication is subject to a commitment tension that undermines control of private beliefs and effective stabilization. Finally, central bank reputation provides valuable incentives to support effective strategic communication.