Central bank communication is itself a key monetary policy tool. A well-crafted message about the current and future state of the economy can influence the private sector’s expectations and guide behavior to ensure that the economy remains strong and prices stable even amid threatening supply-and-demand shocks.
An effective message is generally multifaceted. For instance, when talking about inflation, a central bank may want to inform the public how to interpret data. Is an increase in inflation temporary due to some transitory shocks or more prolonged owing to a slow unwinding of price pressures?
Distinguishing between these two cases and carefully explaining the reasoning behind the data is even more difficult if the private sector has limited attention to devote to the central bank’s public message.
The challenge becomes designing the message in a way that is sufficiently informative to help the private sector navigate the complexity of an