Transparency versus Tone: Public Communication with Limited Commitment

Abstract

Communication of public information is an integral aspect of policy-making by central banks and governments. We study public communication by a policymaker who cannot fully commit to a disclosure policy. The policymaker chooses not only the transparency of its communication (i.e., the precision of the public signal), but also its tone (i.e., the mean of the signal). Without commitment, the policymaker faces a trade-off between being informative and being manipulative. We show that an informative equilibrium exists if and only if the policymaker’s incentives are perfectly aligned with those of the individuals. When there is a conflict of interest, the optimal communication is always completely uninformative. This is not because the public signal is imprecise, but because the policymaker’s tone is overly optimistic or pessimistic --- in equilibrium, the policymaker babbles precisely. We also show that tone is crucial to the effectiveness of policy interventions in the absence of commitment.