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Rules versus Discretion in Central Bank Communication

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Listed:
  • Raphael Galvao
  • Felipe Shalders

Abstract

We study Central Bank communication in a coordination environment. We show that anything goes when the Central Bank cannot commit to a communication policy: both its most and least preferred allocations can be supported in equilibrium, and so can anything in between. We find that the ability to commit to a policy does not eliminate multiplicity and, in particular, does not necessarily implement the Central Bank's most preferred allocation. Under commitment, however, the Central Bank can avoid the least desirable outcomes and assure an intermediate payoff. We show that the Central Bank chooses an information structure with only two messages that leads to perfect coordination among private agents.

Suggested Citation

  • Raphael Galvao & Felipe Shalders, 2020. "Rules versus Discretion in Central Bank Communication," Working Papers, Department of Economics 2020_02, University of São Paulo (FEA-USP).
  • Handle: RePEc:spa:wpaper:2020wpecon2
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    1. Linas Jurkšas & Rokas Kaminskas & Deimantė Vasiliauskaitė, 2024. "ECB monetary policy communication events: Do they move euro area yields?," Bulletin of Economic Research, Wiley Blackwell, vol. 76(2), pages 596-625, April.

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    More about this item

    Keywords

    Central Bank communication; commitment; coordination;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • 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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