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Rules versus discretion in Central Bank communication

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  • Raphael Galvão
  • Felipe Shalders

Abstract

We propose a theoretical framework to study Central Bank communication and to assess the benefits of commitment to a disclosure rule. Our model features a coordination environment, where agents have dispersed private information and their interests are not aligned with those of the Central Bank. Public information can lead to undesirable coordination among agents. We show that anything goes when the Central Bank cannot commit; both its most and least preferred outcomes can be supported in equilibrium, and so can anything in between. We find that commitment does not necessarily implement the Central Bank's most preferred outcome. However, the Central Bank can avoid the least desirable outcomes by choosing an information structure with only two messages that act as action recommendations for agents. Furthermore, our results suggest a higher correlation between fundamentals and outcomes under commitment.

Suggested Citation

  • Raphael Galvão & Felipe Shalders, 2023. "Rules versus discretion in Central Bank communication," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(2), pages 177-203, June.
    • Handle: RePEc:bla:ijethy:v:19:y:2023:i:2:p:177-203
    DOI: 10.1111/ijet.12356
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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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