Central Bank Communication and Multiple Equilibria
AbstractWe 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 InfoPaper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-05.
Date of creation: Feb 2009
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Other versions of this item:
- Kozo Ueda, 2010. "Central Bank Communication and Multiple Equilibria," International Journal of Central Banking, International Journal of Central Banking, vol. 6(3), pages 145-167, September.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-28 (All new papers)
- NEP-CBA-2009-02-28 (Central Banking)
- NEP-CTA-2009-02-28 (Contract Theory & Applications)
- NEP-GTH-2009-02-28 (Game Theory)
- NEP-MAC-2009-02-28 (Macroeconomics)
- NEP-MON-2009-02-28 (Monetary Economics)
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