Multi-Dimensional Uncertainty And Central Bank Communication: What Do Central Bankers Talk About And Why?

When communicating with the public about the state of the economy, central bankers not only need to decide the messages they want to convey, but also how much to focus on various relevant economic variables. I consider a policymaker whose objective is to minimise the mean-squared error of private sector forecasts, and ask how they can achieve this when facing multidimensional uncertainty. By quantifying central bank focus on and uncertainty around various macroeconomic variables, I show that published minutes of the Federal Reserve’s Open Market Committee follow the co-movement patterns predicted by optimal behaviour in the model, while speeches made by committee members do not. I then show, with an event study approach, that speeches have a greater pass-through to media than the minutes. This suggests that focus is sub-optimal where it has the greatest impact.