Competence Implies Credibility

The (reputation for) competence of a central bank at doing its job makes monetary policy under discretion credible and transparent. Based on its reading of the state of the economy, the central bank announces its policy intentions to the public in a cheap-talk game. The precision of its private signal measures its competence. The fineness of the equilibrium message space measures its credibility and transparency. This is increasing in the competence/inflation bias ratio: the public expects a competent central bank to use its discretion more to pursue its "objective" targets than to surprise expectations and stimulate output. (JEL E52, E58)

[1]  Jakob de Haan,et al.  Look Who's Talking: ECB Communication During the First Years of Emu , 2004, SSRN Electronic Journal.

[2]  J. Sobel,et al.  STRATEGIC INFORMATION TRANSMISSION , 1982 .

[3]  R. Barro,et al.  A Positive Theory of Monetary Policy in a Natural Rate Model , 1981, Journal of Political Economy.

[4]  M. Canzoneri.  Monetary policy games and the role of private information , 1984 .

[5]  J. Stein.  Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements , 1989 .

[6]  D. Austen-Smith.  Information transmission in debate , 1990 .

[7]  Guy Laroque,et al.  Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility , 1992 .

[8]  A. Cukierman.  CENTRAL BANK STRATEGY, CREDIBILITY, AND INDEPENDANCE: THEORY AND EVIDENCE , 1992 .

[9]  Lars Stole,et al.  Impetuous Youngsters and Jaded Old-Timers: Acquiring a Reputation for Learning , 1996, Journal of Political Economy.

[10]  A. Blinder.  Central Banking in Theory and Practice , 1998 .

[11]  R. Pierce-Brown,et al.  The economics of Accounting for Growth , 1999 .

[12]  J. Galí,et al.  The Science of Monetary Policy: A New Keynesian Perspective , 1999 .

[13]  D. Romer,et al.  Federal Reserve Information and the Behavior of Interest Rates , 2000 .

[14]  Marco Ottaviani,et al.  The economics of advice , 2000 .

[15]  S. Morris,et al.  Social Value of Public Information , 2002 .

[16]  C. Hellwig.  Public Announcements, Adjustment Delays, and the Business Cycle (November 2002) , 2002 .

[17]  P. Geraats.  Central Bank Transparency , 2002 .

[18]  Marco Ottaviani,et al.  Professional Advice: The Theory of Reputational Cheap Talk , 2002 .

[19]  S. Athey,et al.  THE OPTIMAL DEGREE OF DISCRETION IN MONETARY POLICY BY SUSAN ATHEY, , 2005 .

[20]  M. Battaglini,et al.  TRUST, COORDINATION, AND THE INDUSTRIAL ORGANIZATION OF POLITICAL ACTIVISM , 2003 .

[21]  S. Hart,et al.  Long Cheap Talk , 2003 .

[22]  J. de Haan,et al.  Credibility and Transparency of Central Banks: New Results Based on Ifo's World Economic Survey , 2004, SSRN Electronic Journal.

[23]  Vijay Krishna,et al.  The art of conversation: eliciting information from experts through multi-stage communication , 2004, J. Econ. Theory.

[24]  P. Sørensen,et al.  Reputational cheap talk , 2006 .

[25]  Stefano Eusepi,et al.  Central Bank Communication and Expectations Stabilization , 2007 .