Good communication can enhance policy effectiveness by influencing expectations and by reducing uncertainty. Expectations of future developments and policies influence the actions of economic agents and, consequently, help determine current economic conditions as well as aggregate output and price dynamics. Inflation expectations, in particular, are a key determinant of wage and price-setting and of the concomitant dynamic adjustment of employment and output.
Moreover, expectations of inflation and of the future path of shortterm (real) interest rates determine, given risks and liquidity premia, the longer-term interest rates that influence investment and consumption decisions and, ultimately, medium and longterm price developments.