Central Bank Communication and Multiple Equilibria

Kozo Ueda

No 09-E-05, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We construct a simple model in which a central bank communicates with money market traders. We demonstrate that there exist multiple equilibria. In one equilibrium, traders truthfully reveal their own information, and by learning this, the central bank can make better forecasts. Another equilibrium is a "dog-chasing-its-tail" equilibrium in Blinder (1998). Traders mimic the central bank's forecast, so the central bank simply observes its own forecast from traders. The latter equilibrium is socially worse in that inflation variability becomes larger. We also demonstrate that too high transparency of central banks is bad because it yields the "dog-chasing-its-tail" equilibrium, and that central banks should conduct continuous monitoring or emphasize that their forecasts are conditional because doing so eliminates the "dog- chasing-its-tail" equilibrium.

Keywords: Transparency; disclosure; coordination (search for similar items in EconPapers)
JEL-codes: C72 D83 E52 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-cba, nep-cta, nep-gth, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Journal Article: Central Bank Communication and Multiple Equilibria (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:09-e-05

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