Information and uncertainty in the theory of monetary policy

Theory and practice of monetary policy have changed significantly over the past three decades. A very important part of today's monetary policy is management of the expectations of private market participants. Publishing and justifying the central bank's best forecast of inflation, output, and the instrument rate is argued to be the most effective way to manage those expectations. The author works out the foundations of this new consensus view, compares the communication policies of the Federal Reserve, the ECB and the Bank of England, and discusses possible "limits to transparency". He argues that "model uncertainty" has led several central banks to apply simultaneously prognoses based on several alternative models. Special attention is drawn to the optimal degree of openness concerning central bank ignorance and the possible implications for the institution’s image of competence.