Building Credibility and Influencing Expectations The Evolution of Central Bank Communication

We provide a brief historical overview of the rise of central bank communication (CBC) limiting the analysis to the conduct of monetary policy but with a focus on emerging market economies which have been neglected somewhat. After the financial crisis a shift emerged: CBC evolved from being a complement to a substitute for monetary policy actions. We explore the implications of this shift. We conclude CBC must first and foremost always complement central bank decisions. Whether crisis conditions prevail plays an important role in CBC. We list various channels and devices central banks use to communicate. Next, we focus on the key characteristics of CBC, namely credibility, clarity and consistency. The choice is based on the extant literatures views about the forms of CBC that move markets and expectations the most. Finally, we consider some of the challenges in seeking the best possible CBC strategy. These include: audience heterogeneity; the state of the economy; the volume of CBC. We are especially interested in the impact in emerging markets. Our approach draws on and provides evidence from the international experience but we aim to highlight differences between advanced and emerging market economies. We also speculate about the future of CBC as a result of the pandemic.