Dynamic interaction between public trust and central bank communication

Abstract

Central bank communication does not necessarily benefit from maximal transparency; the optimal strategy depends on public trust levels. This paper integrates public trust into a Macroeconomic Agent-Based Model (MABM) to examine the dynamic interaction between public trust in central bank communication and central bank expectation management strategies. The importance that individuals attach to central bank information is contingent upon trust levels, which adaptively adjusts based on the consistency of the central bank’s past actions and statements. This adjustment reflects a trade-off: excessively transparent communication can lead to information overload and undermine policy consistency, while insufficient transparency increases noise in central bank information. Public responses, shaped by both private and public information, transmit to the ultimate policy outcomes. The central bank then adaptively adjusts its communication strategy based on the feedback from policy outcomes. Our findings indicate that: i) In periods of high and stable public trust, increasing transparency can significantly reduce social welfare losses. ii) When public trust exhibits dynamic adjustment characteristics, central banks should adopt adaptive communication strategies, which refers to the behavioral logic whereby central banks dynamically adjust their information transparency based on fluctuations in public trust levels, thereby achieving a dynamic equilibrium between transparency and policy expectation stability. Our research results indicate that by actively responding to public feedback and implementing adaptive communication strategies, the central bank can continuously improve and stabilize social trust, thereby expanding the operational space for policies.