Central Bank Communication that Works: Lessons from Lab Experiments

Kryvtsov, Oleksiy; Petersen, Luba

doi:10.2139/ssrn.3590866

Cited by 22 publications

(33 citation statements)

References 32 publications

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“…Since then, more investment restrictions have been removed including initiatives that allowed Qualified Foreign Institutional Investors to trade A-shares (2002), Qualified Domestic Institutional Investors to trade H-shares (2006), and the 2 As more fully described in the following section of the article, we implement a shock to asset value by manipulating the interest rate. While other experimental studies examine interest rate policy (e.g., Bao & Zong, 2019;Fischbacher et al, 2013;Giusti et al, 2016;Kryvtsov & Petersen, 2021), our goal is to provide insight on the use of irrelevant information across separated markets.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

An experimental examination of the flow of irrelevant information across markets

Ackert

Kluger

et al. 2021

Southern Economic Journal

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Our study uses an experimental method to provide insight into the flow of information across two asset markets that are fully segmented. In our asset markets, two separate sets of participants trade an identical asset in different markets. We then introduce a shock to fundamentals in one market to examine the response of traders in the second market. Because there is no fundamental shock in the second market, we can separate information-based reactions from responses due to changes in underlying fundamental values. With the separation across markets, we observe whether information relating to a fundamental shock that only affects the shocked market is transmitted to the nonshocked market. Our evidence suggests that traders in one market are observing behavior in the other contemporaneous market. After an information shock, price efficiency declines but improves by the end of trading.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

An experimental examination of the flow of irrelevant information across markets

Ackert

Kluger

et al. 2021

Southern Economic Journal

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“…For a nonlinear implementation, see Hommes et al (2019b) . For a heterogeneous version of the model, see Mauersberger (2017) and Kryvtsov and Petersen (2020). While this system could be simplified and written as a function of just one-and two-period ahead inflation forecasts (Rholes and Petersen 2020), we preferred to capture the fact that people must form expectations about multiple variables when making economic and financial decisions.…”

Section: Modelmentioning

confidence: 99%

Coordinating expectations through central bank projections

Mokhtarzadeh

Petersen

2020

Exp Econ

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Central banks are increasingly communicating their economic outlook in an effort to manage the public and financial market participants’ expectations. We provide original causal evidence that the information communicated and the assumptions underlying a central bank’s projection can matter for expectation formation and aggregate stability. Using a between-subject design, we systematically vary the central bank’s projected forecasts in an experimental macroeconomy where subjects are incentivized to forecast the output gap and inflation. Without projections, subjects exhibit a wide range of heuristics, with the modal heuristic involving a significant backward-looking component. Ex-Ante Rational dual projections of the output gap and inflation significantly reduce the number of subjects’ using backward-looking heuristics and nudge expectations in the direction of the rational expectations equilibrium. Ex-Ante Rational interest rate projections are cognitively challenging to employ and have limited effects on the distribution of heuristics. Adaptive dual projections generate unintended inflation volatility by inducing boundedly-rational forecasters to employ the projection and model-consistent forecasters to utilize the projection as a proxy for aggregate expectations. All projections reduce output gap disagreement but increase inflation disagreement. Central bank credibility is significantly diminished when the central bank makes larger forecast errors when communicating a relatively more complex projection. Our findings suggest that inflation-targeting central banks should strategically ignore agents’ irrationalities when constructing their projections and communicate easy-to-process information.

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“…To understand the possible power of direct communication with households, a series of recent papers rely on lab experiments and randomized control trials in surveys. Kryvtsov and Petersen (2020)…”

Section: A Related Literaturementioning

confidence: 99%

Effective Policy Communication: Targets Versus Instruments

et al. 2020

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Communication targeting households and firms has become a stand-alone policy tool of many central banks. But which forms of communication, if any, can reach ordinary people and manage their economic expectations effectively? In a large-scale randomized control trial, we show that communication manages expectations when it focuses on policy targets and objectives rather than on the instruments designed to reach such objectives. It is especially the least sophisticated demographic groups, which central banks typically struggle to reach, who react more to target-based communication. When exposed to target-based communication, these groups are also more likely to believe that policies will benefit households and the economy. Target-based communication enhances policy effectiveness and contributes to strengthen the public's trust in central banks, which is crucial to guarantee the credibility of their policies.

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Central Bank Communication that Works: Lessons from Lab Experiments

Cited by 22 publications

References 32 publications

An experimental examination of the flow of irrelevant information across markets

An experimental examination of the flow of irrelevant information across markets

Coordinating expectations through central bank projections

Effective Policy Communication: Targets Versus Instruments

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