Observing and shaping the market: the dilemma of central banks
Baeriswyl, Romain; Cornand, Camille; Ziliotto, Bruno (2019), Observing and shaping the market: the dilemma of central banks, Journal of Money, Credit and Banking. 10.1111/jmcb.12682
TypeArticle accepté pour publication ou publié
Journal nameJournal of Money, Credit and Banking
MetadataShow full item record
Swiss National Bank
Groupe d'analyse et de théorie économique [GATE Lyon Saint-Étienne]
CEntre de REcherches en MAthématiques de la DEcision [CEREMADE]
Abstract (EN)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.
Subjects / Keywordsendogenous information; overreaction; central bank communication
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