Observing and shaping the market: the dilemma of central banks

Romain Baeriswyl (), Camille Cornand and Bruno Ziliotto ()
Additional contact information
Romain Baeriswyl: Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland
Bruno Ziliotto: Paris Dauphine University, PSL Research University, Place du Maréchal de Lattre de Tassigny, F-75016 Paris, France

No 1623, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

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.

Keywords: heterogeneous information; public information; endogenous information; overreaction; transparency; coordination (search for similar items in EconPapers)
JEL-codes: D82 E52 E58 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-ger, nep-mac and nep-mon
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ftp://ftp.gate.cnrs.fr/RePEc/2016/1623.pdf (application/pdf)

Related works:
Journal Article: Observing and Shaping the Market: The Dilemma of Central Banks (2020)
Working Paper: Observing and shaping the market: the dilemma of central banks (2019)
Working Paper: Observing and shaping the market: the dilemma of central banks (2018)
Working Paper: Observing and shaping the market: the dilemma of central banks (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:1623

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