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Endogenous Central Bank Information and the Optimal Degree of Transparency

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  • Romain Baeriswyl

    (Munich Graduate School of Economics and Swiss National Bank)

Abstract

As a policymaker, the central bank both observes and shapes the economy. The central bank scrutinizes market activity to assess the state of the economy, and its policy strongly shapes market outcomes. When transparency allows the central bank to shape the economy more effectively, it may also cause the informational role of the economic aggregate to deteriorate. This paper presents a simple model to capture the endogenous nature of central bank information and to address welfare issues. First, accounting for the endogeneity of information highlights the detrimental effects of transparency. A model with endogenous information always calls for a lower degree of transparency than a model with exogenous information. Second, the optimal degree of transparency for endogenous information is unrelated to the accuracy of firms’ private information.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 7 (2011)
Issue (Month): 2 (June)
Pages: 85-111

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Handle: RePEc:ijc:ijcjou:y:2011:q:2:a:3

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Cited by:
  1. Juan David Prada-Sarmiento, 2011. "Multiple policymakers and the social value of public information," BORRADORES DE ECONOMIA 008981, BANCO DE LA REPÚBLICA.
  2. Romain Baeriswyl & Camille Cornand, 2011. "Reducing overreaction to central banks’ disclosures : theory and experiment," Working Papers 1141, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.

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