“Since I’ve become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said."
Alan Greenspan, 22 September 1987 (quoted in Geraats 2007)
“[B]ecause monetary policy affects everyone, I want to start with a plain-English summary of how the economy is doing, what my colleagues and I at the Federal Reserve are trying to do, and why.”
Jerome Powell, 13 June 2018 (transcript of press conference in Federal Reserve System 2018)
Central bank communications have changed a lot in the last 30 years, as illustrated by the statements above, both from chairmen of the Federal Reserve. Central bankers now announce their policy decisions, explain their reasoning and describe their plans for the future. These new communications strategies have been successful with financial markets, as illustrated for example by the effects of forward guidance announcements on long-term interest rates (Swanson 2018).
Central banks have had a more modest, targeted goal of “anchoring” the inflation expectations of households or firms. Yet they appear to have systematically failed in achieving it in most advanced economies. Firms and households in low-inflation countries report beliefs about inflation that are far from anchored. They seem unaware of even dramatic monetary policy announcements, and more generally display almost no knowledge of what central banks do (see, for example, Coibion et al. 2019a, D’Acunto et al. 2018a, and Binder 2017). For example, Figure 1 reports results from a survey of US households and shows few know of the Federal Reserve’s 2% inflation target.
Figure 1 Household beliefs about the Federal Reserve’s inflation target
Source: Coibion et al. (2019).
Notes: The figure plots the distribution of responses from individuals about what inflation rate they thought the Federal Reserve was trying to achieve in the long run.
While this ignorance may, in part, be a sign of central bank success (if firms and households have little incentive to worry about inflation or monetary policy), it is harmful given that non-traditional policies at the zero lower bound (ZLB) are assumed to operate primarily through the inflation expectations of households and firms. If their expectations are unresponsive to central bank announcements and communications, as they seem to be (Coibion et al. 2018, D’Acunto et al. 2018b), then this class of policies cannot be effective. Understanding how central banks can better communicate with the general public to shape their expectations is therefore of first-order importance for the implementation of policies at the ZLB, as well as for establishing the credibility of these institutions with the general public.
The effect of different communications on household inflation expectations
To better understand how central banks could communicate with the general public, we (Coibion, Gorodnichenko and Weber 2019) implemented a large new survey of households to study how different types of communications affect inflation expectations. Specifically, we provided randomly selected subsets of participants with different forms of information treatments. Repeated surveys then allowed to us assess both immediate and longer-run effects of these information treatments on their expectations of inflation.
Providing households with simple statistics about inflation, such as the most recent rate of inflation, the Fed’s inflation target, or the FOMC’s inflation forecast, has strikingly large and immediate effects on their inflation expectations. This type of information reduces households’ average forecast of inflation by between 1.0 and 1.2 percentage points. The implied change in the perceived real interest rate from this adjustment of inflation expectations dwarfs the estimated effects of quantitative easing or forward guidance on nominal (as well as real) interest rates (see Bhattarai and Neely 2018 for a survey of these estimates). The effect on expectations is also mildly persistent: in follow-up interviews, three months after the information treatment, households’ inflation expectations were only half-way back to their original average levels. After six months, they had converged fully.
Not all information is processed in the same way. For example:
- We provided the entire post-meeting statement of the Federal Open Market Committee (FOMC) to a random subset of households instead. Despite its length and detail, the effect of this treatment was no larger than simply providing households with the FOMC inflation forecast – it, too, reduced the average inflation expectation by about 1.2 percentage points.
- But another subset of households was given a news article from the USA Today covering the same FOMC meeting. This easy-to-read summary of the Fed’s decision and motivation had a much smaller effect on inflation expectations: about half that of the other treatments. Despite being written explicitly for the general public, this media transmission of the FOMC’s decision and motivation seems to have either dissipated the message or, more likely given that the article is much clearer than the FOMC statement, been discounted by households because of its origin.
This suggests why monetary policy-makers have had so little success affecting the inflation expectations of households: relying on the conventional media to diffuse their message to the public will not be effective if the public discounts the reports from news media. Consistent with this, Lamla and Vinogradov (2019) find that US monetary policy announcements have no effect on household inflation expectations, even at high frequencies surrounding FOMC announcements, while Coibion et al. (2018) find similar results for firms in the euro area.
These results build on a growing body of research that has used randomised information treatments to characterise how agents learn and respond to new information, especially about monetary policy:
- Coibion et al. (2018c) find that randomised information treatments applied to firms in New Zealand, suggest that managers respond strongly to information about recent inflation or the inflation target.
- Coibion et al. (2018e) find that these managers also respond to higher-order beliefs of other managers.
- Coibion et al. (2018d) document similarly large responses of firm expectations in Italy to information about recent inflation or the inflation target.
- Humziker et al. (2018) find similar results for firms in Switzerland.
- Armantier et al. (2016) study the response of households’ inflation expectations to professionals’ inflation forecasts/
- Roth and Wohlfart (2018) consider how households respond to professionals’ opinions about the likelihood of a recession.
- Armona et al. (2018) assess how households respond to news about housing prices.
- Haldane and McMahon (2018) use randomised treatments to explore whether (and how) changing the presentation of the Bank of England’s statements alters the public’s understanding of their message.
- Binder and Rodrigue (2018) document that households revise their long-run inflation forecasts when presented with information about recent inflation or the central bank’s inflation target.
The cumulative evidence, therefore, suggests that simple messages about inflation or monetary policy presented to households or firms can have very powerful effects on inflation expectations.
Since the 1990s, central banks have become dramatically more open and transparent. But these new communications strategies have not succeeded in reaching the general public. Our results demonstrate that when households are presented with the types of information central banks commonly release, they revise their views much as central bankers would expect them to.
This suggests that communications policies could become significantly more powerful if they could reach the general public. This will require new approaches to breaking through households’ veil of inattention when it comes to inflation and monetary policy.
Armantier, O, S Nelson, G Topa, W van der Klaauw, and B Zafar (2016), “The Price Is Right: Updating Inflation Expectations in a Randomized Price Information Experiment”, Review of Economics and Statistics 98(3): 503-523.
Armona, L, A Fuster, and B Zafar (2018), “Home Price Expectations and Behavior: Evidence from a Randomized Information Experiment”, forthcoming in Review of Economic Studies.
Bhattarai, S and C J Neely (2018), “An Analysis of the Literature on International Unconventional Monetary Policy”, Federal Reserve Bank of St Louis working paper 2016-021C.
Binder, C and A Rodrigue (2018), “Household Informedness and Long-Run Inflation Expectations: Experimental Evidence”, Southern Economic Journal 85(2): 580-598.
Binder, C (2017), “Fed speak on main street: Central bank communication and household expectations,” Journal of Macroeconomics 52(C): 238-251.
Coibion, O, S Frache, Y Gorodnichenko, and Rodrigo L (2018a), “Causal Effects of Information Treatments for Uruguayan Firms”, manuscript.
Coibion, O, Y Gorodnichenko, and R Kamdar (2018b), “The Formation of Expectations, Inflation and the Phillips Curve”, Journal of Economic Literature 56(4): 1447-1491.
Coibion, O, Y Gorodnichenko, and S Kumar (2018c), “How Do Firms Form their Expectations? New Survey Evidence”, American Economic Review 108(9): 2671-2713.
Coibion, O, Y Gorodnichenko, and T Ropele (2018d), “Inflation Expectations and Firm Decisions: New Causal Evidence”, NBER working paper 25412.
Coibion, O, Y Gorodnichenko, S Kumar, and J Ryngaert (2018e), “Do you know that I know that you know…? Higher order beliefs in survey data”, NBER working paper w24987.
D’Acunto, F, D Hoang, M Paloviita, and M Weber (2019a), “IQ, Expectations, and Choice”, NBER working paper 25496.
D’Acunto, F, D Hoang, M Paloviita, and M Weber (2018b), “Human Frictions to the Transmission of Economic Policy”, University of Chicago, Becker Friedman Institute for Economics working paper 2019-07.
Federal Reserve (2018), "Transcript of Chairman Powell’s Press Conference", 13 June.
Geraats, P M (2007), “The Mystique of Central Bank Speak”, International Journal of Central Banking 3(1): 1-44.
Haldane, A, and M McMahon (2018), “Central Bank Communications and the General Public”, AEA Papers and Proceedings 108: 578-583.
Humziker, H-U, C Raggi, and R Rosenblatt-Wisch (2018), “The impact of guidance, short-term dynamics and individual characteristics on firms’ long-term inflation expectations", SNB Working Papers 18/2018.
Lamla, M J, and D V Vinogradov (2019), “Central Bank Announcements: Big News for Little People?”, manuscript.
Roth, C and J Wohfart (2018), “How do expectations about the economy affect personal expectations and behavior?” CESifo working paper 7154.
Swanson, E T (2018), “Measuring the Effects of Federal Reserve Forward Guidance and Asset Purchases on Financial Markets”, NBER working paper 23311.