What Are the Key Scientific Principles for Monetary Policy Communication?
To think about what kind of central bank communication is desirable, let’s begin by considering some key scientific principles regarding the objectives of monetary policy and the benefits of central bank transparency. Objectives of Monetary Policy The modern science of monetary policy is based on the idea that the central bank’s objective is to maximize the economic well-being of the households in the economy (Mishkin 2007d). Broadly speaking, this objective can be expressed in terms of two components: minimizing the deviations of inflation from its optimal rate and minimizing the deviations of real economic activity from its so-called natural rate, which is the efficient level determined by the productive potential of the economy. Moreover, this analytical formulation of the objectives of monetary policy captures the essential mission of the Federal Reserve System, as summarized by the Federal Reserve’s dual mandate to promote price stability and maximum employment.3 By the way, I bel
