Transparency, Expectations, and Forecasts.pdfVIP

F E D E RA L R ES E RV E BA N K O F AT LA NTA Transparency, Expectations, and Forecasts ANDREW BAUER, ROBERT A. EISENBEIS, DANIEL F. WAGGONER, AND TAO ZHA Bauer is a senior economic analyst in the macropolicy section, Eisenbeis is executive vice president and director of research, Waggoner is a research economist and assistant policy adviser in the f inancial section, and Zha is a research economist and policy adviser in the macropolicy section, all in the A tlanta Fed’s research department. They thank Jinill Kim, Brian Madigan, John Robertson, and Ellis Tallman for critical comments and Cindy Soo and Eric Wangf or research assistance. A similar version of this research is also published with the same title as Federal Reserve Bank of Atlanta Working Paper 2006-3. any macroeconomists have argued that a central bank should be transparent Mabout its obj ectives, its views about the economic outlook, and the reasoning behind its policy changes (see Faust and Leeper 2005). In 1994 the Federal Open Market Committee (FOMC) began to release statements accompanying changes in the federal funds rate target. Since then, the degree of specificity of the statements and the guidance provided on the likely course of future policy have evolved signifi- cantly.1 In a recent paper, Woodford (2005) discusses two kinds of central-bank com- munications: current policy decisions and the central bank’s view of likely future policy. He articulates four categories of information—the central bank’s view of current eco- nomic conditions, current operating targets, strategies guiding policy decision making, and the outlook for future policy—that a central bank might seek to communicate to the public. Woodford argues that these open communications are “beneficial, not only from the point of view of reducing the uncertainty with which traders and other economic decision makers must contend, but also f