Sectoral communication faces credibility challenge for central banks
A new Banque de France working paper explores central bank communication in multi-sector economies. It finds that optimal sectoral disclosure rules are often time-inconsistent, posing a credibility challenge.
Commitment to transparency
Central banks increasingly use sectoral narratives to communicate about inflation.
This Banque de France (BDF) working paper proposes a theory of monetary communication in a multi-sector New Keynesian economy, where the central bank privately observes aggregate and sector-specific fundamentals and chooses both a policy instrument and a public message.
Under commitment, the optimal disclosure rule has a sharp threshold structure: the central bank always discloses aggregate conditions.
Depending on sectoral elasticities, sector size, and price rigidities, it either fully discloses both components or pools them into a single message.
The post-pandemic rise in price-adjustment frequency in the euro area suggests that full sectoral disclosure is increasingly the optimal communication rule, providing a structural interpretation for observed shifts in ECB communication.
The credibility dilemma
Without commitment, optimal communication is generically time-inconsistent.
The central bank has an ex-post incentive to distort the disclosed message to influence firms' posterior beliefs, creating a communication analogue of the Barro-Gordon credibility problem in a multi-sector economy.
This problem is inherently multi-sectoral; in a one-sector limit, conflicting incentives offset, and full disclosure remains credible.
In a dynamic extension with unobservable policymaker types, reputation partially disciplines communication but does not fully restore the commitment outcome, as welfare losses reflect type uncertainty rather than strategic deviation.
Credibility's new frontier
This paper offers a crucial theoretical framework for understanding the complexities of modern central bank communication.
It highlights a fundamental tension between optimal information disclosure and the central bank's ex-post incentives, especially in a multi-sector world.
The findings underscore that effective sectoral communication requires more than just transparency; it demands robust commitment mechanisms to maintain credibility.