Divided committees and strategic vagueness

Abstract

Recent research has found that central bank communications affect outcomes, for example, by moving financial markets and shaping inflation expectations. Missing from the literature is an understanding of why the content of communications varies in the first place. We present an agenda setting model of a monetary policy committee (MPC) with committee members who bargain over the degree of vagueness in central bank communications. We generate hypotheses about the types of MPCs that are expected to produce more or less vague communications. We test our propositions empirically using data from the U.S. Federal Open Market Committee (FOMC) during Arthur Burns’s tenure (1970–1978) and find evidence that the FOMC uses vaguer language when the committee chair and median committee member have aligned preferences than when their biases are opposed. Our results show that the institutional design of the MPC matters for the level of vagueness committees communicate.