The Central Banks’ Influence on Public Expectations

Abstract:

It is known that central banks make announcements in different forms to influence the private sector. The private sector pays attention to these announcements, and the announcements play an important role in the formation of its expectations. According to rational expectations theory any kind of attempt to manipulate expectations should not work but the role of announcements has not been studied in a learning framework. In a New Keynesian model I analyze the effects of announcements that have no effect on the fundamentals of the model. The private sector learns a specification of the structural equations which includes announcements as a causal factor. The central bank determines the optimal announcement. Under some circumstances the private sector discounts the value it attaches to the announcement, but in other circumstances the central bank can achieve better results by fine tuning announcements.