Using a model of island economy where financial markets aggregate dispersed informationof the public, we analyze how two-way communication between the central bankand the public affects inflation dynamics. When inflation target is observable and credibleto the public, markets provide the bank...

Several authors have documented a reduced variability ofoutput and inflation in the United States since the beginningof the 1980s.1 In fact, a comparison of the 1980:1-2001:2 periodwith the two preceding decades shows that the standarddeviation of quarterly output growth has fallen 30...