Central Bank Communication and Multiple Equilibria
In this paper, we construct a simple model for communication between a central bank and money-market traders. It is demonstrated that there are 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 “dog-chasing-its-tail” equilibrium described by Blinder (1998). Traders mimic the central bank’s forecast, so the central bank simply observes its own forecast from traders. The latter equilibrium is socially worse, as inflation variability becomes larger. As policy implications, we find that too-high transparency of central banks is bad because it yields the “dog-chasing-its-tail” equilibrium, and central banks should conduct continuous monitoring or emphasize that their forecasts are conditional because doing so eliminates the “dog-chasing-its-tail” equilibrium. We also consider the possibility of the existence of an optimal degree of transparency.
When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2010:q:3:a:5. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bank for International Settlements)
If references are entirely missing, you can add them using this form.