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Observing and shaping the market: the dilemma of central banks

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  • Romain Baeriswyl
  • Camille Cornand
  • Bruno Ziliotto

Abstract

While the central bank observes market activity to assess economic fundamentals, it shapes the market outcome through the conduct of monetary policy. A dilemma arises from this dual role because the more the central bank shapes the market, the more it influences the informational content of market prices. This paper analyses the optimal monetary policy action and disclosure when central bank information is endogenous for three operational frameworks: pure communication, action and communication, and signalling action. Although taking the endogenous nature of central bank information into account calls for less activism from the central bank, full transparency remains optimal when the weight assigned to price dispersion in social welfare takes on its micro-founded value.

Suggested Citation

  • Romain Baeriswyl & Camille Cornand & Bruno Ziliotto, 2018. "Observing and shaping the market: the dilemma of central banks," Working Papers 2018-03, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2018-03
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Endogenous information; overreaction; central bank communication;

    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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