Observing and shaping the market: the dilemma of central banks

Camille Cornand, Romain Baeriswyl and Bruno Ziliotto
Additional contact information
Romain Baeriswyl: Swiss National Bank - Swiss National Bank
Bruno Ziliotto: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres

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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.

Date: 2019
Note: View the original document on HAL open archive server: https://hal.science/hal-01644269v1
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Published in Journal of Money, Credit and Banking, 2019, ⟨10.1111/jmcb.12682⟩

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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 (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:hal:journl:hal-01644269

DOI: 10.1111/jmcb.12682

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