WHEN AND HOW MUCH TO TALK CREDIBILITY AND FLEXIBILITY IN MONETARY-POLICY WITH PRIVATE INFORMATION

This paper analyzes the role of noisy or imprecise announcements in mitigating the basic credibility problem in monetary policy. Based on a model where the monetary authority's private information gives rise to an unavoidable trade-off between flexibility and credibility, the analysis finds that noisy announcements can serve as a meaningful form of communication to make that trade-off more favorable. However, such talk is not cheap. The analysis predicts that those central banks who can speak more precisely are those who are less likely to speak at all.