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Central Bank Communication and Multiple Equilibria

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  • Kozo Ueda

    (Institute for Monetary and Economic Studies, Bank of Japan)

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:ijc:ijcjou:y:2010:q:3:a:5
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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, vol. 34(C), pages 114-128.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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