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Central bank transparency and the crowding out of private information in an experimental asset market

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  • Menno Middeldorp
  • Stephanie Rosenkranz

Abstract

Central banks have become increasingly communicative. An important reason is that democratic societies expect more transparency from public institutions. Central bankers, based on empirical research, also believe that sharing information has economic benefits. Communication is seen as a way to improve the predictability of monetary policy, thereby lowering financial market volatility and contributing to a more stable economy. However, a potential side-effect of providing costless public information is that market participants may be less inclined to invest in private information. Theoretical results suggest that this can hamper the ability of markets to predict future monetary policy. We test this in a laboratory asset market. Crowding out of information acquisition does indeed take place, but only where it is most pronounced does the predictive ability of the market deteriorate. Notable features of the experiment include a complex setup based directly on the theoretical model and the calibration of experimental parameters using empirical measurements.

Suggested Citation

  • Menno Middeldorp & Stephanie Rosenkranz, 2011. "Central bank transparency and the crowding out of private information in an experimental asset market," Staff Reports 487, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:487
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    References listed on IDEAS

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    1. van der Cruijsen, C.A.B. & Eijffinger, S.C.W., 2007. "The Economic Impact of Central Bank Transparency : A Survey," Discussion Paper 2007-06, Tilburg University, Center for Economic Research.
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    Keywords

    Monetary policy; Disclosure of information; Banks and banking; Central;
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