To help guide public expectations, it is incumbent upon an inflation targeting central bank to disclose its outlook for future inflation. Managing the expectations channel is, therefore, critical. Apart from influencing the market with its policy actions, communication also allows the central bank to obtain useful feedback from its stakeholders, which in turn is an important input to policy formulation.
Given these arguments in favor of communication, the next critical issue is the extent of transparency. How transparent should central banks be? My view is that central banks should take a pragmatic approach to communication. While transparency is a good policy, excessive transparency could hamper the effectiveness of monetary policy and potentially harm market stability.