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Money talks

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  • Hoerova, Marie
  • Monnet, Cyril
  • Temzelides, Ted

Abstract

We study credible information transmission by a benevolent Central Bank. We consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the Central Bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the Central Bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus, lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy. JEL Classification: D80, E40, E52

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Paper provided by European Central Bank in its series Working Paper Series with number 1091.

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Date of creation: Sep 2009
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Handle: RePEc:ecb:ecbwps:20091091

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Keywords: Information; Interest Rates; monetary policy;

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References

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  1. D. Backus & J. Driffil, 1998. "Inflation and Reputation," Levine's Working Paper Archive 625, David K. Levine.
  2. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-45, December.
  3. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
  4. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  5. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, vol. 94(2), pages 91-98, May.
  6. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  7. Aleksander Berentsen & Cyril Monet, 2006. "Monetary Policy in a Channel System," IEW - Working Papers 295, Institute for Empirical Research in Economics - University of Zurich.
  8. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  9. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2005. "Signaling in a Global Game: Coordination and Policy Traps," Discussion Papers 1400, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. Otmar Issing, 2012. "Central Banks - Paradise Lost," IMES Discussion Paper Series 12-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Panzera, Fabio S., 2011. "Price stability and financial imbalances: rethinking the macrofinancial framework after the 2007-8 financial crisis," FSES Working Papers 423, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  3. Julian A. Parra POlanía, 2012. "Transparency: can central banks commit to truthful communication?," Borradores de Economia 711, Banco de la Republica de Colombia.
  4. Paul Bloxham & Christopher Kent & Michael Robson, 2011. "Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study," NBER Working Papers 16845, National Bureau of Economic Research, Inc.
  5. Eser, Fabian & Schwaab, Bernd, 2013. "Assessing asset purchases within the ECB’s securities markets programme," Working Paper Series 1587, European Central Bank.
  6. Alessi, Lucia & Detken, Carsten, 2011. "Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity," European Journal of Political Economy, Elsevier, vol. 27(3), pages 520-533, September.

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