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Reducing overreaction to central banks' disclosures:theory and experiment

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  • Romain Baeriswyl
  • Camille Cornand

Abstract

Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). We show that, in theory, both communication strategies are strictly equivalent in the sense that overreaction can be indifferently mitigated by reducing the degree of publicity or by reducing the degree of transparency. We run a laboratory experiment to test whether theoretical predictions hold in a game played by human beings. In line with theory, the experiment does not allow the formulation of a clear preference in favor of either communication strategy. This paper then discusses the opportunity for central banks to choose between partial transparency and partial publicity to control market reaction to their disclosures.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2012-08.

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Length: 60 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:snb:snbwpa:2012-08

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Keywords: heterogeneous information; public information; overreaction; transparency; coordination; experiment;

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References

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  1. Hyun Song Shin & Stephen Morris, 2001. "Coordination Risk and the Price of Debt," FMG Discussion Papers, Financial Markets Group dp373, Financial Markets Group.
  2. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers, UCLA Department of Economics 283, UCLA Department of Economics.
  3. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1313-26, December.
  4. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 91-98, May.
  5. Christian Hellwig & Laura Veldkamp, 2009. "Knowing What Others Know: Coordination Motives in Information Acquisition," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 223-251.
  6. Frank Heinemann & Rosemarie Nagel & Peter Ockenfels, 2004. "The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information," Econometrica, Econometric Society, Econometric Society, vol. 72(5), pages 1583-1599, 09.
  7. Camille Cornand, 2006. "Speculative Attack and Informational Structure: an Experimental Study," Post-Print, HAL halshs-00360088, HAL.
  8. Heinemann, Frank & Illing, Gerhard, 2002. "Speculative attacks: unique equilibrium and transparency," Journal of International Economics, Elsevier, Elsevier, vol. 58(2), pages 429-450, December.
  9. Cornand, Camille & Heinemann, Frank, 2006. "Optimal Degree of Public Information Dissemination," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 158, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  10. Jeffery D. Amato & Hyun Song Shin & Stephen Morris, 2003. "Communication and monetary policy," BIS Working Papers, Bank for International Settlements 123, Bank for International Settlements.
  11. Stephen Morris & Hyun Song Shin & Hui Tong, 2006. "Social Value of Public Information: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 453-455, March.
  12. Camille Cornand, 2006. "Speculative Attacks and Informational Structure: an Experimental Study," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 14(5), pages 797-817, November.
  13. repec:bla:restud:v:76:y:2009:i:1:p:223-251 is not listed on IDEAS
  14. Camille Cornand & Frank Heinemann, 2010. "Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities," CESifo Working Paper Series, CESifo Group Munich 2947, CESifo Group Munich.
  15. Lars E. O. Svensson, 2006. "Social Value of Public Information: Comment: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 448-452, March.
  16. Romain Baeriswyl, 2011. "Endogenous Central Bank Information and the Optimal Degree of Transparency," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 7(2), pages 85-111, June.
  17. Rosemarie Nagel & Antonio Cabrales & Roc Armenter, 2002. "Equilibrium selection through incomplete information in coordination games: An experimental study," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 601, Department of Economics and Business, Universitat Pompeu Fabra.
  18. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1521-1534, December.
  19. Stahl, Dale II & Wilson, Paul W., 1994. "Experimental evidence on players' models of other players," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 25(3), pages 309-327, December.
  20. Baeriswyl, Romain & Cornand, Camille, 2010. "The signaling role of policy actions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(6), pages 682-695, September.
  21. Dmitry Shapiro & Xianwen Shi & Artie Zillante, 2009. "Robustness of Level-k Reasoning in Generalized Beauty Contest Games," Working Papers, University of Toronto, Department of Economics tecipa-380, University of Toronto, Department of Economics.
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Citations

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Cited by:
  1. Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Working Papers, Bank of Canada 14-12, Bank of Canada.
  2. Camille Cornand & Frank Heinemann, 2013. "Limited higher order beliefs and the welfare effects of public information," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 1324, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Bennani, Hamza, 2014. "Does one word fit all? The asymmetric effects of central banks' communication policy," MPRA Paper 57150, University Library of Munich, Germany.
  4. Emna Trabelsi & Walid Hichri, 2013. "Central bank Transparency and Information Dissemination : An experimental Approach," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 1336, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  5. Camille Cornand & Frank Heinemann, 2014. "Measuring Agents' Reaction to Private and Public Information in Games with Strategic Complementarities," Working Papers, HAL halshs-00925018, HAL.
  6. Camille Cornand & Franck Heinemann, 2013. "Measuring Agents’ Reaction to Private and Public Information in Games with Strategic Complementarities," Working Papers, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure 1341, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  7. Oleksiy Kryvtsov & Luba Petersen, 2013. "Expectations and Monetary Policy: Experimental Evidence," Working Papers, Bank of Canada 13-44, Bank of Canada.

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