Central Bank Communication: Theory And Practice

Central bank communication can be defined as the process in which the central bank discloses the monetary policy information to the target groups and seeks the information digested by the target groups. Central banks were shrouded in mystery previously, but now the essence of monetary policy is the art of managing expectations has already became received wisdom, and central banks around the world are willing to pursue of their monetary policy objective through central bank communication. Central bank communication is no longer the taboo of the central bank circles, but has become the new monetary policy instrument available to the central bank beyond the traditional tools. Although the practice had made tremendous progress, because of its art essence, the research of central bank communication is still in very preliminary status. This paper can be seen as a valuable attempt in this field. Based on the previous research, this paper carries out systematic theoretical research into central bank communication and summarizes the related international experiences aiming to fill the gaps in theoretical research and provide valuable guidance for the practice.Based on the fully literature review, this paper unfolds the research into central bank communication under the logic of "what is central bank communication, why is it desirable to carry out central bank communication, and how to implement it". After defining central bank communication clearly and pointing out the relationship between central bank communication and the effectiveness of monetary policy, this paper focuses on the study of how to implement it. Firstly, this paper analyzes the three feasible boundaries of central bank communication and points out how to expand the feasible areas. Secondly, by building a Morris-Shin style model with communication errors, this paper successfully answers the question that when should the central bank talk freely, keep silent, and mumble with great incoherence, then we get the first fundamental principles for the effective central bank communication which says that the central bank should actively disclose accurate information, but for the disclosure of information with low accuracy, it should adopt a very cautious attitude. Thirdly, by building a Morris-Shin style model with two different industries, this paper successfully answers the question that which communication methods should the central bank take if it has decided to disclose information, the we get the second fundamental principles for the effective central bank communication which says that central bank should take the transparent communication method instead of the black-box-style disclosure means aiming to facilitate the use of the private information of agents. Fourthly, this paper makes a detailed investigation into the practices of central bank communication around the world, and draws some valuable experiences and skills. It is easy to find that the practices confirm the main conclusions of this paper. Finally, this paper analyzes the central bank communication practices of the People's Bank of China thoroughly, and puts forward some operable recommendations to improve the effectiveness of the central bank communication of PBC.The academic contribution of this paper can be expressed as follow. Firstly, this paper is the first attempt to carry out systematic research into central bank communication, the conclusion of this paper can be seen as the basic analytical framework for the follow-up research. Secondly, by analyzing the feasible boundaries of central bank communication and building two Morris-Shin style models, this paper successfully summarizes the basic premise and fundamental principles for the effective central bank communication, and these can provide scientific guidance for the practice. Thirdly, this paper makes a detailed investigation into the practices of central bank communication around the world, and draws some valuable experiences and skills.