DP17930 The Central Bank Crystal Ball: Temporal information in monetary policy communication
Effective central bank communication provides information that the public wants but does not have. Using a new textual methodology to quantify the temporal information in central bank communication, we argue that central bank assessments of the (latent) state of the economy can be the source of the public's information deficit, rather than superior information necessarily. The implication of this is that communication of a single, fixed, reaction function, even if desirable, is likely impossible even if preferences remain fixed over time. Communication of how the central bank is assessing the economy should be emphasised in addition to any forward guidance.