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How Much Information Should Interest Rate-Setting Central Banks Reveal?Charles WyploszUniversity of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR) Aileen Gosselin-LotzUniversity of Geneva - Graduate Institute of International Studies (HEI) Pierre GosselinUniversity of Geneva - Graduate Institute of International Studies (HEI) May 2006 CEPR Discussion Paper No. 5666 Abstract: Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal.
Number of Pages in PDF File: 41 Keywords: Central bank transparency JEL Classification: E42, E52, E58 working papers seriesDate posted: July 31, 2006Suggested CitationContact Information
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