"Simplicity-Professionalism"Trade-Off of Central Bank Communication and the Public Actions
Communication has emerged as a crucial tool for central banks in managing expectations.In recent years,there has been a transformation in the communication strategies of central banks,with a greater emphasis on engaging with the general public.The People's Bank of China has also adopted a diversified approach to policy communication,thereby effectively managing and guiding public expectations.In the theoretical framework of rational expectations,it is assumed that the public can comprehend any information without incurring costs,thereby advocating for enhanced accuracy to minimize communicating efficiency losses.Actu-ally,the general public often struggles to understand professional communication from central banks due to a lack of fi-nancial knowledge.Current practices among central banks worldwide aimed at the general public primarily focus on sim-plifying language.Empirical studies also underscore the importance of reducing the use of professional terminology to en-hance understanding.While professional expressions may create barriers to understanding,the issue of information distor-tion resulting from overly simplified communication should not be overlooked,as both can contribute to increased public disagreement and reduced social welfare.How should central banks balance the simplicity and professionalism of com-munication with the necessary level of professionalism when communicating with the general public?This paper begins with a theoretical perspective,introducing individual heterogeneous processing costs of public in-formation within the framework of the"beauty contest"model characterizing the degree of information professionalism by the quantity of professional concepts.While the increase in professional concepts enhances information precision and reduces public understanding discrepancies,it simultaneously raises comprehension costs.Consequently,the number of the general public capable of understanding professional information gradually declines,resulting in a lack of common knowledge,which exacerbates public disagreement.The theoretical model suggests that central banks face a"simplicity-professionalism"trade-off.Theoretically,there exists optimal professionalism to minimize public disagreement,accord-ing to which this paper puts forward a hypothesis:public disagreement and the central bank's communication profession-alism show a U-shaped relationship.In the empirical part,we manually compile a lexicon of Chinese monetary policy terms to measure the professionalism of communication texts by the frequency of occurrence of professional monetary policy terms.Utilizing big data from Weibo and high-frequency stock price data,we confirm that both Weibo divergence and stock price divergence exhibit a U-shaped relationship with the professionalism of central bank communication.By distinguishing between experts and the general public on Weibo,this study finds that experts demonstrate a higher capac-ity to accept professional communication,thereby substantiating the rationality of the heterogeneous information process-ing capability hypothesis of the theoretical model.The marginal contributions of this paper are as follows.First,it supplements the theoretical literature advocating that central banks should strive to enhance information precision by introducing the concept of heterogeneous information pro-cessing costs,suggesting that excessively high professionalism may impede the public's understanding of public informa-tion,ultimately hindering the reduction of public disagreement.Second,it adds to the empirical literature emphasizing the positive effects of simplifying central bank communication by demonstrating that excessive simplicity can lead to a de-cline in the precision of public information,thereby expanding public action disagreement.Consequently,this paper chal-lenges the binary perspective of the theoretical and empirical literature,bridging the gap between the two.Both excessive and insufficient professionalism can have negative impacts.Third,this study offers rich policy implications concerning the adjustment of communication strategies,real-time evaluation of communication effectiveness,and the establishment of a sustainable communication mechanism.
Central Bank CommunicationPublic DisagreementsInformation Processing CostHigh-Frequency Data Event Study
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NSTL
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