Central bank communication and stabilization policies under firms’ motivated beliefs

Camille Cornand and Rodolphe Dos Santos Ferreira

Economic Theory, 2025, vol. 79, issue 2, No 10, 687-721

Abstract: Abstract Using a simple microfounded macroeconomic model with price making firms and a central bank maximizing the welfare of a representative household, we show that the presence of firms’ motivated beliefs has stark consequences for central banks’ optimal communication and stabilization policies. Under pure communication, motivated beliefs overweighting the accuracy of firms’ private information may reverse the bang-bang solution of transparency found in the literature under objective beliefs and lead to intermediate levels of communication. Similarly, when communication and stabilization policies are combined, motivated beliefs overweighting firms’ ability to process idiosyncratic information in general may reverse the bang-bang solution of opacity applying under objective beliefs, leading again to intermediate levels of communication and stabilization.

Keywords: Motivated beliefs; Public and private information (accuracy); Overconfidence; Communication policy; Stabilization policy (search for similar items in EconPapers)
JEL-codes: D83 D84 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Central bank's communication and stabilization policies under firms'motivated beliefs (2024)
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DOI: 10.1007/s00199-024-01598-1

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