Self-Fulfilling Crises and Central Bank Communication

Raphael Galvão () and Felipe Shalders
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Raphael Galvão: Universidad Alberto Hurtado

ILADES-UAH Working Papers from Universidad Alberto Hurtado/School of Economics and Business

Abstract: This paper studies how much information a Central Bank should release to less informed private agents. Agents have dispersed information about the state of the economy, and their actions are strategic complements. Thus, the Central Bank’s public disclosure of information can generate an undesirable coordination among agents and self-fulfilling crises. We show that the Central Bank will choose an information structure that sends only two messages. We characterize the optimal information structure and prove that it retains the uniqueness equilibrium property of global games. We also show that, without the ability to commit to an information disclosure rule, the Central Bank could be worse o↵ by releasing public information.

Pages: 33 pages
Date: 2019-03
New Economics Papers: this item is included in nep-gth and nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:ila:ilades:inv327

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