Central Bank and Private Sector's Welfare Under Partial Transparency Versus Publicity: A Two-Player Monetary Policy Game

This chapter contributes to the continuous debate on the effects of public information. The debate initiated with Morris and Shin (2002) who showed that heightening the precision of public information can be detrimental to welfare in a beauty contest framework, because when agents have both private and public information, they may overreact to the public information since it acts as a focal point. If the private agents overreact to public information, then a policy of limited transparency may be warranted. Some researchers suggest partial announcement (limited publicity), others propose to disseminate the public information privately to each agent (limited precision) with some idiosyncratic noise in order to reduce overreaction. Those chapter, however, miss the following fact; they don't take into account the interaction between private sector and the central bank. We extend those studies by setting the framework as a two-player monetary policy game between the central bank and the private sector by allowing explicitly for a central bank to be one of the many contributors of the public signal. We show (1) how introducing a certain degree of opacity affects both players and determines the conditions under which an intermediate transparent strategy improves the outcome of the private sector, as well as of the central bank. We find that reducing transparency doesn't affect the two players in the same way. (2) It turns out that respective players' losses are strictly identical when the central bank implements the optimal degree of transparency or the optimal degree of publicity. We establish then an equivalence relationship in terms of effects between publicity and transparency for both actors.