729 - Central Bank Communication and Interest Rate Rules

Wetenschappelijke publicatie
Date 1 April 2003

The central bank's influence on private sector expectations is an important channel of monetary policy. Therefore, it is important for a central bank to pay attention to its communication. It should also be aware that the public might not be willing or able to process all the information that the central bank provides. In this paper, we explicitly take the public's information processing constraint into account when we design the interest rate rule. We find that if inflationary expectations are important relative to the output gap in determining current inflation, the central bank should be less activist when the public has a tighter information processing constraint. Key words: interest rate rules, information processing, expectation formation, central bank JEL codes: D83, E52, E58