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Central Bank's Action and Communication

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  • Baeriswyl, Romain

Abstract

This paper contributes to the ongoing debate about the welfare effect of public information. In an environment characterized by imperfect common knowledge and strategic complementarities, Morris and Shin (2002)argue that noisy public information may be detrimental to welfare because public information is attributed too large a weight relative to its face value since it serves as a focal point. While this argument has received a great deal of attention in central banks and in the financial press, it considers communication as the sole task of a central bank and ignores that communication usually goes with a policy action. This paper accounts for the action task of a central bank and analyzes whether public disclosure is beneficial in the conduct of monetary policy when the central bank primarily tries to stabilize the economy with an instrument that is optimal with respect to its perhaps mistaken view. In this context, it turns out that transparency is particularly beneficial when central bank’s information is poorly accurate because it helps reducing the distortion associated with badly suited policies.

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Bibliographic Info

Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 1381.

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Date of creation: 2007
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Handle: RePEc:lmu:muenec:1381

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Keywords: differential information; monetary policy; transparency;

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References

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  1. Peter Kondor, 2004. "The more we know, the less we agree: public announcements and higher-order expectations," LSE Research Online Documents on Economics 24645, London School of Economics and Political Science, LSE Library.
  2. Klaus Adam, 2004. "Optimal Monetary Policy with Imperfect Common Knowledge," DNB Staff Reports (discontinued) 116, Netherlands Central Bank.
  3. Camille Cornand & Frank Heinemann, 2004. "Optimal Degree of Public Information Dissemination," CESifo Working Paper Series 1353, CESifo Group Munich.
  4. Stephen Morris & Hyun Song Shin, 2006. "Optimal Communication," Levine's Bibliography 321307000000000236, UCLA Department of Economics.
  5. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  6. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
  7. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: unique equilibrium and transparency," Journal of International Economics, Elsevier, vol. 58(2), pages 429-450, December.
  8. Stephen Morris & Hyun Song Shin, 2005. "Central Bank Transparency and the Signal Value of Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(2), pages 1-66.
  9. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  10. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
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Citations

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Cited by:
  1. David P. Myatt & Chris Wallace, 2008. "On the Sources and Value of Information: Public Announcements and Macroeconomic Performance," Economics Series Working Papers 411, University of Oxford, Department of Economics.
  2. Baeriswyl, Romain & Cornand, Camille, 2007. "Monetary policy and its informative value," Proceedings, Federal Reserve Bank of San Francisco, issue March, pages 1-34.

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