Monetary Communication and Credibility in a Multi-Sector Economy

Figure 1. Sectoral and Heterogeneity Language in ECB Communication

Non-Technical Summary

Modern central banks do not only set interest rates; they also communicate their assessment of economic conditions through statements, press conferences, speeches, and analytical publications. In recent years this communication has become increasingly sectoral, distinguishing for instance services from goods or energy from non-energy components. The euro area is a case in point: although the European Central Bank's mandate targets price stability in the euro area as a whole, the inflation surge brought sectoral narratives to the foreground. Using a text-based measure applied to a decade of ECB communications, Figure 1 documents an increase in the salience of sector-specific and heterogeneity-related language around the inflation surge. This raises a natural question: what role can sectoral communication play in stabilization, when stabilizing individual sectors is not usually a policy objective?

A single policy instrument cannot simultaneously offset shocks that affect sectors differently. A central bank that is better informed than firms about sectoral conditions may, however, help guide pricing decisions through the information it chooses to disclose. To study these elements, we develop a theory of monetary communication in a multi-sector New Keynesian economy. The central bank privately observes both the aggregate and sector-specific economic conditions across sectors, and it chooses both a policy instrument and a public message that firms observe before setting prices. The framework is a communication counterpart to the analysis of time-inconsistent monetary policy in Barro and Gordon (1983), where the source of time inconsistency lies in the central bank's communication rather than in its policy instrument.

The analysis delivers three results, in which the multi-sector structure plays a central role.

First, under commitment, the optimal disclosure rule has a threshold form. The central bank always communicates aggregate conditions, which the instrument can stabilize. Whether it also discloses sector-specific conditions depends on a composite statistic that weighs the gains from aligning relative prices with fundamentals against the costs of price dispersion within sectors. This trade-off is governed by primitives such as the frequency of price adjustment: as prices become more flexible, sectoral disclosure becomes more attractive. In an application to the euro area, the post-pandemic rise in price-adjustment frequency raises the likelihood that full sectoral disclosure is the optimal rule, providing a structural interpretation of the shift documented in Figure 1.

Second, the commitment-optimal rule is generically not credible. Once firms are about to set prices, the central bank has an incentive to shade the sector-specific component to reduce price dispersion within sectors ex post. This is a communication analogue of the Barro and Gordon credibility problem, and it is inherently multi-sector: in the one-sector limit the conflicting incentives offset and full disclosure remains credible. The credibility problem arises only when sectors differ.

Third, in a dynamic setting in which firms are uncertain whether the central bank is committed or strategic, reputation partially disciplines communication but does not restore the commitment outcome. A strategic central bank can secure short-term stabilization gains, but long-run welfare remains below the level attained under credible, truthful communication.
 

Mots-clés : politique monétaire et communication, cohérence temporelle et crédibilité, réputation, apprentissage bayésien
Codes JEL : D82, E52, E58, E61