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Central bank's two-way communication with the public and inflation dynamics

Author

Listed:
  • Kosuke Aoki

    (LSE)

  • Takeshi Kimura

    (Bank of Japan)

Abstract

Using a model of island economy where financial markets aggregate dispersed information of the public, we analyze how two-way communication between the central bank and the public affects inflation dynamics. When inflation target is observable and credible to the public, markets provide the bank with information about the aggregate state of the economy, and hence the bank can stabilize inflation. However, when inflation target is unobservable or less credible, the public updates their perceived inflation target and the information revealed from markets to the bank becomes less perfect. The degree of uncertainty facing the bank crucially depends on how two-way communication works.

Suggested Citation

  • Kosuke Aoki & Takeshi Kimura, 2008. "Central bank's two-way communication with the public and inflation dynamics," Bank of Japan Working Paper Series 08-E-10, Bank of Japan.
    • Handle: RePEc:boj:bojwps:08-e-10
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    References listed on IDEAS

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    Cited by:

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    3. Man-Keung Tang & Mr. Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 2011/209, International Monetary Fund.

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    More about this item

    Keywords

    Monetary policy; central bank communication; inflation target;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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