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Observing and shaping the market: the dilemma of central banks

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Date
2019
Dewey
Analyse
Sujet
endogenous information; overreaction; central bank communication
JEL code
E.E5.E52; E.E5.E58; D.D8.D82
Journal issue
Journal of Money, Credit and Banking
Publication date
12-2019
Publisher
Wiley
DOI
http://dx.doi.org/10.1111/jmcb.12682
URI
https://basepub.dauphine.fr/handle/123456789/20355
Collections
  • CEREMADE : Publications
Metadata
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Author
Baeriswyl, Romain
176795 Swiss National Bank
Cornand, Camille
102550 Groupe d'analyse et de théorie économique [GATE Lyon Saint-Étienne]
Ziliotto, Bruno
60 CEntre de REcherches en MAthématiques de la DEcision [CEREMADE]
Type
Article accepté pour publication ou publié
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.

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