Private News and Monetary Policy: Forward guidance or the expected virtue of ignorance

         
Author Name FUJIWARA Ippei (Faculty Fellow, RIETI) / WAKI Yuichiro (University of Queensland)
Creation Date/NO. March 2016 16-E-027
Research Project On Monetary and Fiscal Policy under Structural Changes and Societal Aging
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Abstract

When the central bank has information that can help the private sector predict the future better, should it communicate such information to the public? Not always. In a canonical New Keynesian model, the central bank finds it optimal to commit to being secretive about news shocks. There exists an expected virtue of ignorance; and secrecy constitutes optimal policy. This result holds in the canonical model when the news is about cost-push shocks, or shocks to the monetary policy objective, or shocks to the natural rate of interest, and even when the zero lower bound of nominal interest rates is taken into account. We also demonstrate through numerical examples that the same result holds for richer models too. A lesson of our analysis for a central bank's communication strategy is that, while it is crucial that the central bank uses Odyssean forward guidance to communicate its history-dependent policy action plan to the private sector, Delphic forward guidance that helps the private sector form more accurate forecasts of future shocks can be undesirable.