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Central Bank Communication and Multiple Equilibria

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  • Kozo Ueda

    (Institute for Monetary and Economic Studies, Deputy Director and Bank of Japan (Email: kouzou.ueda boj.or.jp))

Abstract

We construct a simple model in which a central bank communicates with money market traders. We demonstrate that there exist multiple equilibria. In one equilibrium, traders truthfully reveal their own information, and by learning this, the central bank can make better forecasts. Another equilibrium is a gdog-chasing-its-tailh equilibrium in Blinder (1998). Traders mimic the central bankfs forecast, so the central bank simply observes its own forecast from traders. The latter equilibrium is socially worse in that inflation variability becomes larger. We also demonstrate that too high transparency of central banks is bad because it yields the gdog-chasing-its-tailh equilibrium, and that central banks should conduct continuous monitoring or emphasize that their forecasts are conditional because doing so eliminates the gdog- chasing-its-tailh equilibrium.

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Bibliographic Info

Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-05.

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Date of creation: Feb 2009
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Handle: RePEc:ime:imedps:09-e-05

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Keywords: Transparency; disclosure; coordination;

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Cited by:
  1. Salle, Isabelle & Yıldızoğlu, Murat & Sénégas, Marc-Alexandre, 2013. "Inflation targeting in a learning economy: An ABM perspective," Economic Modelling, Elsevier, Elsevier, vol. 34(C), pages 114-128.

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