Observing and Shaping the Market: The Dilemma of Central Banks

Romain Baeriswyl, Camille Cornand and Bruno Ziliotto

Journal of Money, Credit and Banking, 2020, vol. 52, issue 8, 1973-2005

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 outcomes. This paper analyzes how accounting for the endogeneity of information affects optimal monetary policy. By reducing the accuracy of central bank information, endogenous information calls for a higher degree of opacity, weakens accommodation policy to shocks, and broadens the range of parameters for which taking a signaling action is detrimental to welfare.

Date: 2020
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Citations: View citations in EconPapers (6)

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https://doi.org/10.1111/jmcb.12682

Related works:
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)
Working Paper: Observing and shaping the market: the dilemma of central banks (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:52:y:2020:i:8:p:1973-2005

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