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Bounded Rationality in Central Bank Communication

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  • Wonseong Kim
  • Choong Lyol Lee

Abstract

This study explores the influence of FOMC sentiment on market expectations, focusing on cognitive differences between experts and non-experts. Using sentiment analysis of FOMC minutes, we integrate these insights into a bounded rationality model to examine the impact on inflation expectations. Results show that experts form more conservative expectations, anticipating FOMC stabilization actions, while non-experts react more directly to inflation concerns. A lead-lag analysis indicates that institutions adjust faster, though the gap with individual investors narrows in the short term. These findings highlight the need for tailored communication strategies to better align public expectations with policy goals.

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  • Wonseong Kim & Choong Lyol Lee, 2024. "Bounded Rationality in Central Bank Communication," Papers 2411.04286, arXiv.org.
    • Handle: RePEc:arx:papers:2411.04286
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