Transparency versus Tone: Public Communication with Limited Commitment
Northwestern University - Kellogg School of Management - Department of Finance
Communication of public information is an integral aspect of policymaking by central banks and governments. We study public communication in a linear-quadratic, Gaussian economy where individuals have an incentive to coordinate with each other, the policymaker cannot fully commit to a disclosure policy, and there are potential conflicts of interest between the policymaker and individuals. In contrast to standard models, we allow the policymaker to choose not only the transparency of its communication (i.e., the precision of the public signal), but also its tone (i.e., the mean of the signal). We show that an informative equilibrium exists if and only if the policymaker’s incentives are aligned with those of the individuals. When there is a conflict of interest, the optimal disclosure policy in the unique equilibrium is completely uninformative. This is not because the public signal is imprecise, but because the policymaker’s tone is overly optimistic or pessimistic -- in equilibrium, the policymaker babbles precisely. This result is robust to several quantitative and qualitative modifications of the benchmark model.
Number of Pages in PDF File: 18
Keywords: Commitment, disclosure policy, coordination, policy intervention
JEL Classification: D82, D83working papers series
Date posted: January 23, 2014
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