Effect of Central Bank Communication on Heterogeneous Expectations (or under Adaptive Learning)

The Reserve Bank of New Zealand was a pioneer to adopt communication and publishing of projections as a main tool to stabilize expectations. This work contributes to existing literature by checking if Reserve Bank’s inflation projections influence private agents’ expectations, which are formed under adaptive learning mechanism. Expectations are calculated by recursive learning algorithm. Results show that inflation projections have long-run effect on expectations with maximum on fifth forecast period. In contrast with results of works with expectations, which are collected via surveys, Central Bank projections have negative effect in first two periods with subsequent growth. Possible reasons are that lag between announcement and inflation perception by public can exist or that public can adjust growth of inflation projections by lowering own expectations.