Communication of Central Bank Thinking and Inflation Dynamics

Author/Editor:

Man-Keung Tang ; Xiangrong Yu

Publication Date:

August 1, 2011

Electronic Access:

Free Full Text (PDF file size is 792 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper studies the role of central bank communication of its economic assessment in shaping inflation dynamics. Imperfect information about the central bank's assessment - or the basis for monetary policy decisions - could complicate the private sector's learning about its policy response function. We show how clear central bank communication, which facilitates agents' understanding of policy reasoning, could bring about less volatile inflation and interest rate dynamics, and afford the authorities with greater policy flexibility. We then estimate a simple monetary model to fit the Mexican economy, and use the suggested paramters to illustrate the model's quantitative implications in scenarios where the timing, nature and persistence of shocks are uncertain.

Series:

Working Paper No. 11/209

Subject:

English

Publication Date:

August 1, 2011

ISBN/ISSN:

9781463902193/1018-5941

Stock No:

WPIEA2011209

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

32

Please address any questions about this title to publications@imf.org