Interest Rate Signals and Central Bank Transparency
The present paper extends the literature on central bank transparency that relies on information heterogeneity among private agents in four directions. First, it adds the interest rate to the list of signals that the central bank can reveal. Second, it allows for more than one economic fundamental. Third, it extends the range of uncertainties that matter. So far the literature has focused on uncertainty about the economic fundamentals, assumed to be estimated with known precision; we also allow for uncertainty about precision. Fourth, it derives results that are general in the sense that they do not depend on any particular social welfare criterion. Each extension sheds new light on the role of central bank transparency. Focusing on the signaling role of the interest rate, we consider various degrees of transparency, ranging from full opacity, to just publishing the interest rate, to also revealing the signals and estimates of their precision. While uncertainty about the fundamentals results in the now familiar common knowledge effect, uncertainty about information precision creates a fog effect, which reduces the quality of decisions taken by the central bank and the private sector. In the absence of the fog effect, full transparency is generally not desirable, because it deprives the central bank from the ability to optimally manipulate private sector expectations. When the central bank's fog is large, we find that full transparency is usually the best communication strategy. This result tends to survive when the private sector's fog is large. Full opacity is only desirable when the central bank is poorly informed. Another result that emerges from our analysis is that it is usually desirable for the central bank to divulge some information, even if it is erroneous, and known to be erroneous. The reason is that, when the private sector knows that the central bank is mistaken, it needs to evaluate the extent of its mistakes.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Sep 2007|
|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: |
References listed on IDEAS
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.:
- Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
- Jeffery D. Amato & Stephen Morris & Hyun Song Shin, 2002.
"Communication and Monetary Policy,"
Oxford Review of Economic Policy,
Oxford University Press, vol. 18(4), pages 495-503.
- Jeffery D. Amato & Hyun Song Shin & Stephen Morris, 2003. "Communication and monetary policy," BIS Working Papers 123, Bank for International Settlements.
- Stephen Morris & Jeffery D. Amato & Hyun Song Shin, 2004. "Communication and Monetary Policy," Yale School of Management Working Papers ysm345, Yale School of Management.
- 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.
- Jeffery Amato & Stephen Morris & Hyun Song Shin, 2003. "Communication and Monetary Policy," Levine's Working Paper Archive 506439000000000330, David K. Levine.
- Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
- Jeffery Amato & Hyun Song Shin, 2003.
"Public and Private Information in Monetary Policy Models,"
666156000000000092, UCLA Department of Economics.
- 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.
- 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.
- Hyun Song Shin & Jeffery D. Amato, 2003. "Public and private information in monetary policy models," BIS Working Papers 138, Bank for International Settlements.
- 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.
- Alex Cukierman, 2009.
"The Limits of Transparency,"
Banca Monte dei Paschi di Siena SpA, vol. 38(1-2), pages 1-37, 02.
- 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.
- Mauro F Roca, 2010. "Transparency and Monetary Policy with Imperfect Common Knowledge," IMF Working Papers 10/91, International Monetary Fund.
- 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.
- Charles Bean, 2005. "Monetary Policy in an Uncertain World," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 6(1), pages 31-53, January.
- Vickers, John, 1986. "Signalling in a Model of Monetary Policy with Incomplete Information," Oxford Economic Papers, Oxford University Press, vol. 38(3), pages 443-55, November.
- John C. B. Cooper, 2004. "Dollarisation in Theory and Practice," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 5(4), pages 79-89, October.
- 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.
- Carl E. Walsh, 2007. "Optimal Economic Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 5-36, March.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:6454. 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.