Central Bank Communication, Adaptive Learning and Monetary Policy Effectiveness
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| Title | Central Bank Communication, Adaptive Learning and Monetary Policy Effectiveness
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| Author | Zhou Yumei and Zhou Xuan |
| Organization | Central University of Finance and Economics; Renmin University of China, RUC |
| Email | gym333@126.com；xuanzhou@ruc.edu.cn |
| Key Words | Central Bank Communication; Adaptive Learning; Monetary Policy; Public Information; Private Information |
| Abstract | Communication has become the main way for the central bank to guide market expectations in developed countries. This paper introduces public information, private information and adaptive learning into a standard dynamic stochastic general model to study the impact of central bank’s communication on monetary policy effectiveness. The model shows that the public information revealed by central bank can crowd out private information. Agents tend to put excessive weight on public information, so the effectiveness of central bank’s communication depends on the precision of public information. If the central bank’s public information is more accurate than private information, central bank’s communication can reduce the welfare loss by about 15% relative to non-communication. Moreover, the more accurate the central bank’s information is, the less the welfare loss is and the more effective the monetary policy is. On the contrary, if the central bank’s public information is less accurate than private information, then central bank’s communication may be harmful. Therefore, in addition to raising central bank’s information accuracy, the People’s Bank of China should place more emphasis on communication. |
| Serial Number | WP1165 |
| Time | 2017-03-07 |
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