Modern Central Bank Communication

Theory and practice of monetary policy have changed significantly over the past three decades. An important part of today’s monetary policy is the management of the expectations of market participants. The most effective way to manage the expectations of market participants is the publication and explanation of the central bank’s forecast of inflation, output, and the instrument rate. The importance of the appropriate communication channels has grown due to the greater independence gained by the central banks and the accompanying need for accountability. With an independent central bank, the public needs to be able to judge whether or not it has succeeded in using the appropriate instrument to achieve its goal. Accountability is the quid pro quo of the central bank independence and communication facilitates the means to transparency which is important for accountability. Hence communication plays an important role in explaining to the public both the instruments and the goals as well as the reasons behind the decisions made by the authorities (Winkler, 2000). This is especially true in the case where a central bank chooses to follow a strict policy rule, such as inflation targeting