How Can Central Banks Improve Monetary Policy Communication to Firms?
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The world faced by central banks in the wake of the Global Financial Crisis has demanded new and unconventional approaches to implement monetary policy. Responding to problems like the zero-lower bound on interest rates has seen tools like forward guidance offered through central bank communication become more commonplace in many countries. The Reserve Bank of New Zealand has been an early adopter of many of these modern features of central banking, but key among them has been that they offered quantitative forward guidance since 1997—well before the crisis. Recent academic work has shown that this relatively long history of communication has not translated into informedness about monetary policy for many firms of New Zealand. This is a problem, as it is ultimately the firms who set prices and wages within the economy. By using a survey of firms from New Zealand, this thesis examines what indicates a firm is likely to have low errors in their inflation forecasting, with the goal of determining how the central bank can improve their communication to firms. Smaller firms, firms with a lower price than their competitors and firms with a low margin between sales and costs are generally more likely to have more accurate inflation forecasts. Additionally, this thesis shows that firms with at least one affiliation to an outside body, for example a trade association, are more likely to have lower error in their inflation forecast. This result provides strong potential for improving central bank communication to firms.