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Observing and shaping the market: the dilemma of central banks

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  • Romain Baeriswyl

    () (Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland)

  • Camille Cornand

    () (Univ Lyon, CNRS, GATE UMR 5824, F-69130 Ecully, France)

  • Bruno Ziliotto

    () (Paris Dauphine University, PSL Research University, Place du Maréchal de Lattre de Tassigny, F-75016 Paris, France)

Abstract

While the central bank observes the market activity to assess economic fundamentals, it shapes the market outcome through its policy interventions. The more the central bank influences the market, the more it spoils the informational content of economic aggregates. How should the central bank act and communicate when it derives its information from observing the market? This paper analyses the optimal central bank's action and disclosure under endogenous central bank's information for three operational frameworks: pure communication, action and communication, and signaling action. When the central bank takes an action, it would be optimal for the central bank to be fully opaque to prevent its disclosure from deteriorating the information quality of market outcomes. However, in the realistic case where central bank's action is observable, it may be optimal to refrain from implementing any action.

Suggested Citation

  • Romain Baeriswyl & Camille Cornand & Bruno Ziliotto, 2016. "Observing and shaping the market: the dilemma of central banks," Working Papers 1623, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
  • Handle: RePEc:gat:wpaper:1623
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    heterogeneous information; public information; endogenous information; overreaction; transparency; coordination;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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