How Much Information Should Interest Rate-Setting Central Banks Reveal?
Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal.
|Date of creation:||May 2006|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeffery Amato & Stephen Morris & Hyun Song Shin, 2003.
"Communication and Monetary Policy,"
Levine's Working Paper Archive
506439000000000330, David K. Levine.
- Stephen Morris & Jeffery D. Amato & Hyun Song Shin, 2004. "Communication and Monetary Policy," Yale School of Management Working Papers ysm345, Yale School of Management.
- Jeffery D. Amato & Hyun Song Shin & Stephen Morris, 2003. "Communication and monetary policy," BIS Working Papers 123, Bank for International Settlements.
- Jeffrey D. Amado & Stephen Morris & Hyun Song Shin, 2003. "Communication and Monetary Policy," Cowles Foundation Discussion Papers 1405, Cowles Foundation for Research in Economics, Yale University.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
- Geraats, P.M., 2004.
"Transparency and Reputation: The Publication of Central Bank Forecasts,"
Cambridge Working Papers in Economics
0473, Faculty of Economics, University of Cambridge.
- Geraats Petra M., 2005. "Transparency and Reputation: The Publication of Central Bank Forecasts," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-28, February.
- 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.
- McCallum, Bennett T, 1995.
"Two Fallacies Concerning Central-Bank Independence,"
American Economic Review,
American Economic Association, vol. 85(2), pages 207-211, May.
- Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc.
- Jeffery D. Amato & Hyun Song Shin, 2004.
"Public and Private Information in Monetary Policy Models,"
DNB Staff Reports (discontinued)
117, Netherlands Central Bank.
- Hyun Song Shin & Jeffery D. Amato, 2003. "Public and Private Information in Monetary Policy Models," Computing in Economics and Finance 2003 38, Society for Computational Economics.
- Jeffery Amato & Hyun Song Shin, 2003. "Public and Private Information in Monetary Policy Models," Levine's Bibliography 666156000000000092, UCLA Department of Economics.
- Hyun Song Shin & Jeffery D. Amato, 2003. "Public and private information in monetary policy models," BIS Working Papers 138, Bank for International Settlements.
- Hyun Song Shin & Jeffery D. Amato, 2004. "Public and Private Information in Monetary Policy Models," Econometric Society 2004 North American Winter Meetings 59, Econometric Society.
- Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
- Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
- Lars E.O. Svensson, 2005. "Social Value of Public Information: Morris and Shin (2002) Is Actually Pro Transparency, Not Con," NBER Working Papers 11537, National Bureau of Economic Research, Inc.
- Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
- Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:5666. 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: ()
If references are entirely missing, you can add them using this form.