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Observing and shaping the market: the dilemma of central banks

Romain Baeriswyl (), Camille Cornand and Bruno Ziliotto

No 2018-03, Working Papers from Swiss National Bank

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 prices. This paper analyses the optimal monetary policy action and disclosure when central bank information is endogenous for three operational frameworks: pure communication, action and communication, and signalling action. Although taking the endogenous nature of central bank information into account calls for less activism from the central bank, full transparency remains optimal when the weight assigned to price dispersion in social welfare takes on its micro-founded value.

Keywords: Endogenous information; overreaction; central bank communication (search for similar items in EconPapers)
JEL-codes: D82 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018
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Related works:
Working Paper: Observing and shaping the market: the dilemma of central banks (2017)
Working Paper: Observing and shaping the market: the dilemma of central banks (2016) Downloads
Working Paper: Observing and shaping the market: the dilemma of central banks (2016) Downloads
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