Central bank transparency and the crowding out of private information in an experimental asset market (original) (raw)
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Central Bank Transparency and the Crowding Out of Private Information in Financial Markets
2011
We use an asset market model based on to demonstrate that increased central bank transparency may lead to crowding out of costly private information, which can result in a market that is less able to predict monetary policy. Consequently, for intermediate levels of public information precision, it is optimal for the central bank to actually disclose less than it knows. We show that such crowding out can occur, even in the likely scenario that public information is more precise than private information, under the plausible assumption that traders are nearly riskneutral. Central banks should be aware of possible adverse e¤ects of transparency and take note if market participants reduce investment in information.
Reducing Overreaction to Central Banks' Disclosures: Theory and Experiment
Journal of the European Economic Association, 2014
Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). We show that, in theory, both communication strategies are strictly equivalent in the sense that overreaction can be indifferently mitigated by reducing the degree of publicity or by reducing the degree of transparency. We run a laboratory experiment to test whether theoretical predictions hold in a game played by human beings. In line with theory, the experiment does not allow the formulation of a clear preference in favor of either communication strategy. This paper, however, makes a case for partial transparency rather than partial publicity because the latter seems increasingly difficult to implement in the present information age and is associated with discrimination as well as fairness issues.
SSRN Electronic Journal, 2000
How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents' information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England's inflation report and to macroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents' information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses.
Transparency, Disclosure and the Federal Reserve
2005
This paper assesses the change in Federal Reserve policy introduced in 1999, with the publication of statements about the outlook for monetary policy (and later about the balance of risks) immediately after each FOMC meeting. We find that markets anticipated monetary policy decisions equally well under this new disclosure regime than before, but arrived at their expectations in different ways. Under the new regime, markets extract information from the statements, whereas before, they needed to revert to other types of Fed communication in the inter-meeting periods, and come to their own assessment of the implications of macroeconomic data releases. Taken together, these findings suggest that the Fed's new disclosure practice may indeed have improved transparency in the sense that information is now released to the markets at an earlier time and with clearer signals, but that the Fed can extract less information from observing market reactions to macroeconomic data releases. JEL ...
What Can We Learn About Monetary Policy Transparency from Financial Market Data?
SSRN Electronic Journal, 2001
In diesem Papier wird untersucht, wie in Großbritannien makroökonomische Neuigkeiten auf ausgewählte Terminkontrakte und Wechselkurse wirken. In der Studie wird eine breite Palette regelmäßig veröffentlichter Daten betrachtet, einschließlich der Entscheidungen über die Notenbankzinsen. Wir untersuchen, ob die Reaktionen auf diese Ankündigungen sich geändert haben, seit der Bank von England im Mai 1997 operationelle Unabhängigkeit gewährt worden ist. Die Ergebnisse zeigen, dass durchaus Veränderungen zu verzeichnen sind in der Art und Weise, wie auf den Finanzmärkten ökonomische Daten die Wertpapierpreise ändern. Insbesondere dokumentieren wir, dass die Reaktionen auf Zinsänderungen schneller erfolgen aber auch, dass die Stärke der Reaktionen geringer ist. * * * * The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of England or the Bundesbank. An earlier version of this paper appeared as a Bank of England Working Paper (for more details please go to www.bankofengland.co.uk). We would like to thank our colleagues at the Bank of England and the participants of the Bundesbank\CFS Conference on "Transparency in Monetary Policy" in October 2000 for comments on earlier versions of this paper. We would also like to thank Mark Johnson and Steven Seddon for providing excellent research assistance.
Observing and Shaping the Market: The Dilemma of Central Banks
SSRN Electronic Journal, 2016
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.
The value of central bank transparency when agents are learning
European Journal of Political Economy, 2007
We examine the role of central bank transparency when the private sector is modeled as adaptive learners. In our model, transparent policies enable the private sector to adopt correctly specified models of inflation and output while intransparent policies do not. In the former case, the private sector learns the rational expectations equilibrium while in the latter case it learns a restricted perceptions equilibrium. These possibilities arise regardless of whether the central bank operates under commitment or discretion. We provide conditions under which the policy loss from transparency is lower (higher) than under intransparency, allowing us to assess the value of transparency when agents are learning.
Monetary Policy Transparency:Too Good to be True?
In the last fifteen years or so the conduct of monetary policy in developed economies has converged in a number of ways which include an increasing emphasis on ‘openness’ and ‘transparency’ in policy-making. There is a widespread belief that transparency in the conduct of UK monetary policy has increased substantially since, and because of, the introduction of inflation targeting and associated institutional reforms in 1992. A large measure of this belief is based upon studies which reveal the increased ability of money market agents to anticipate accurately the change in official rates. In this paper, we have updated one of those studies and show that the findings are largely unaffected by events of the last five years. More interestingly, perhaps, we have floated the possibility that this improved anticipation may be the result of developments other than institutional reforms. For example, it is notable that the Bank of England has made fewer and smaller interest changes since 199...
The Economic Impact of Central Bank Transparency: A Survey!
Challenges in Central Banking: The …, 2010
... of the money-demand disturbance) may make the trade-off between flexibility (to stabilize output) and credibility (to eliminate the inflation bias) more favorable to the extent that the noisy announcements reveal the monetary authority's private forecast (Garfinkel and Oh 1995). ...