When Can Central Banks Anchor Expectations? Policy Communication and Controllability

21 Pages Posted: 17 Feb 2009

See all articles by Nicola Acocella

Nicola Acocella

University of Rome I - Department of Methods and Models for Economics, Territory and Finance (MEMOTEF)

Giovanni Di Bartolomeo

University of Teramo

Andrew J. Hughes

Cardiff Business School; Centre for Economic Policy Research (CEPR); Vanderbilt University - College of Arts and Science - Department of Economics

Date Written: December 2008

Abstract

Rational expectations are often used as a strong argument against policy activism, as they may undermine or neutralize the policymakers actions. Although this sometimes happens, rational expectations do not always imply policy invariance or ineffectiveness. In fact, in certain circumstances rational expectations can enhance our power to control an economy over time. In those cases, policy announcements, properly communicated, can be used to extend the impact of conventional policy instruments. In this paper we present a general forward-looking policy framework and use it to provide a formal justification for attempting to anchor expectations, and as a possible justification for publishing interest rate forecasts or tax rate projections. This approach allows us to test when policymakers can and cannot expect to be able to manage expectations.

Keywords: controllability, fiscal policy, monetary policy, policy neutrality, Rational expectations

JEL Classification: C61, C62, E52, E61, E62

Suggested Citation

Acocella, Nicola and Di Bartolomeo, Giovanni and Hughes Hallett, Andrew J., When Can Central Banks Anchor Expectations? Policy Communication and Controllability (December 2008). CEPR Discussion Paper No. DP7078, Available at SSRN: https://ssrn.com/abstract=1344637

Nicola Acocella

University of Rome I - Department of Methods and Models for Economics, Territory and Finance (MEMOTEF) ( email )

Via del Castro Laurenziano 9
Roma, Roma 00161
Italy
+390649766359 (Phone)

HOME PAGE: http://www.memotef.uniroma1.it/newdip/utenti/acocellanicola/

Giovanni Di Bartolomeo

University of Teramo ( email )

Campus Coste S. Agostino
Via R. Balzarini 1, Località Colleparco
Teramo, TE 64100
Italy

Andrew J. Hughes Hallett (Contact Author)

Cardiff Business School ( email )

Aberconway Building
Cardiff CF10 3EU
United Kingdom
+44 292 087 001 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-322-8539 (Phone)
615-343-8495 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3
Abstract Views
423
PlumX Metrics