Putting It All Together

The concluding chapter summarizes the key findings in the manuscript and discusses three main contributions of the book. First, the book shows that variation in the preferences of committee members, whether members have aligned or opposed inflation preferences, affects the content of central bank communications. Second, it shows that changes in the content of central bank announcements impact households’ inflation expectations. Third, it shows that more precise economic news attenuates inflation expectations, helping to stabilize inflation. The chapter then relates these findings to broader discussion on central bank design, transparency, and accountability. The author argues that having greater preference diversity on central bank committees ensures more horizontal accountability as well as inflation stability. The chapter concludes with a number of ideas for future research, new applications, and extensions.

Testing the Theory in Latin America

This chapter moves from studying developed countries to a sample of countries in Latin America over time. The chapter presents evidence that an increase in the information environment, in terms of its level of precision, exerts an attenuating and significant effect on the mean and standard deviation of forecasters’ inflation expectations, ultimately lowering inflation outcomes. The finding is robust to the inclusion of policy credibility, persistence in inflation, economic output, and month and country effects. When conducting instrumental variable analysis, similarly signed results hold. The main results imply that an increase in information precision helps to lower aggregate levels of inflation and that the channel that this works through is by lowering the weight of prior expectations, as predicted by the theoretical argument. Importantly, the results persist even when considering a sample of countries with relatively variable inflation outcomes and less established (and therefore less credible) economic institutions.

A Model of Central Bank Communication

Chapter 3 introduces a simple bargaining model that determines how precisely (or not) committee members will communicate with the mass public. The game assumes that the monetary committee consists of an agenda-setting chair and a median committee member, who bargain over the content of an official policy statement, aiming to send a consensual public message. The equilibrium outcomes illustrate different predicted levels of vagueness in the policy statement as a consequence of whether members have alike or opposing preferences or biases. The main empirical implications investigated in the rest of the book are introduced: When the chair and member have opposing preferences, policy statements will be more precise than when the chair and the member have similar preferences; when the chair and the member have opposing preferences, the more dissimilar they are, the greater the number of edits to the policy statement; and finally, more precise economic information will attenuate the publics’ inflation expectations, reducing aggregate inflation.

Monetary Policy Committees and Central Bank Communication

This chapter starts by tracing trends in central bank transparency. It reports key policy changes by some of the world’s most important central banks: the FOMC, the European Central Bank, the Bank of England, and the Bank of Japan. The second section reviews the theoretical and empirical literature on central bank design, paying close attention to the role of committee size, composition, and decision-making protocol, and classifies central banks around the world according to these features. The third section outlines the aim of central bank communications: to broadcast news and to reduce noise. The author argues that while previous literature has examined both committee design and central bank communications, it has done so in isolation. By putting these two topics together, the chapter argues that we can better understand, first, how different types of committees may be better at communicating and, second, how communication affects households’ inflation expectations and inflation.

Central Bank Committees and Political Communication

Using archival, textual information from Federal Open Market Committee (FOMC) transcript data as well as FOMC policy statements, chapter 4 demonstrates that when the chair and median member have opposing inflation preferences, the FOMC communicates with greater precision than when the chair and median member have aligned inflation preferences. The author finds this is true, however, when computing the median members able to cast a public vote. The chapter also provides supportive evidence that when committee members are more dissimilar, the number of textual changes to the policy announcement is higher than otherwise. Theoretically, the chapter shows that a combination of members’ preferences and voting rights matter for the level of uncertainty words used in the official policy statement. Methodologically, the chapter demonstrates the innovative use of supervised and unsupervised learning techniques to construct quantitative measures from text as data, applied to central bank committees.

Central Bank Announcements and Inflation Expectations

Chapter 5 tests the main mechanism that central bank communication changes households’ inflation expectations. The chapter reports evidence from a survey experiment conducted on a sample of German households. It shows that households that receive more precise central bank information react more to central bank news than those who receive more vague information. Estimating the average treatment effect across the two experimental groups, the result is that more precise information attenuates both short-term (one-year-ahead) and medium-term (five-years-ahead) inflation forecasts but not longer-term expectations (ten years ahead). Other findings are that while younger people, women, and those less educated and financially literate have higher prior inflation expectations than their older, male, and financially literate counterparts, the evidence suggests that information rather than socioeconomic or demographic features matters most of all.

Crafting Consensus

This chapter introduces central bankers as “wordsmiths,” skilled users of words, who work together to construct and edit a monetary policy statement with an intention to drive the economy by shaping the public’s beliefs about the future. The chapter starts off showing that central bankers can be both relatively vague and relatively precise with the language that they use. Baerg highlights previous explanations on the benefits of delegating monetary policy to a monetary policy committee rather than to a single individual. Known benefits include better information aggregation and problem-solving. The author introduces the argument that monetary policy committees that have diverse policy preferences are more likely to be precise and illustrates, using examples from Federal Open Market Committee (FOMC) transcript data, how policy makers bargain over the policy statement in ways similar to how they negotiate changes in interest rates. The chapter concludes with a brief overview of the structure of the manuscript.