When it meets on 7 February, the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) will evaluate the extent of inflationary pressure in the economy and decide if the policy interest rate needs revision. But it is the manner of communication of the policy decision that may determine its effectiveness in regulating inflation, a new National Bureau of Economic Research study based in US suggests.
The study authored by Olivier Coibion of University of Texas and others finds that monetary policy is more effective in setting inflation expectations when households are directly provided with simple statistics about inflation and the central bank’s inflation target and forecast than when such information reaches them through traditional media and news articles.
Inflation expectations are central to the effective implementation of monetary policy under the inflation targeting regime. When actual inflation drifts from the target in the short run, the crucial task before policymakers is to reassure that inflation will be brought back in line with the target, so that inflation expectations do not feed into actual inflation.
The authors show that the effect on inflation expectations was similar for households who were provided with the entire post-meeting statement of the Federal Open Market Committee (FOMC) and those who were simply provided with the FOMC inflation forecast. But the effect on inflation expectations was much smaller for households who were given a news article from the USA Today covering the Fed’s decision at the same FOMC meeting.
The authors argue that the effectiveness of monetary policy communication to the public is significantly dampened when transmitted through news media. Households effectively dismiss much of the information content when presented to them in the form of a news article. The authors, thus suggest that central banks should find new ways to reach the public without relying on traditional media.
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