Central Bank Transparency and the Crowding Out of Private Information in an Experimental Asset Market
Menno H. Middeldorp
Federal Reserve Bank of New York
University of Utrecht - Utrecht University School of Economics; Centre for Economic Policy Research (CEPR)
March 10, 2011
FRB of New York Staff Report No. 487
Central banks have become increasingly communicative. An important reason is that democratic societies expect more transparency from public institutions. Central bankers, based on empirical research, also believe that sharing information has economic benefits. Communication is seen as a way to improve the predictability of monetary policy, thereby lowering financial market volatility and contributing to a more stable economy. However, a potential side-effect of providing costless public information is that market participants may be less inclined to invest in private information. Theoretical results suggest that this can hamper the ability of markets to predict future monetary policy. We test this in a laboratory asset market. Crowding out of information acquisition does indeed take place, but only where it is most pronounced does the predictive ability of the market deteriorate. Notable features of the experiment include a complex setup based directly on the theoretical model and the calibration of experimental parameters using empirical measurements.
Number of Pages in PDF File: 44
Keywords: experimental economics, private information, financial market efficiency, central bank communication and transparency
JEL Classification: C92, D82, E58, G14working papers series
Date posted: March 10, 2011
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