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Money Talks

35 Pages Posted: 28 Apr 2012 Last revised: 17 Sep 2015

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Cyril Monnet

Federal Reserve Bank of Philadelphia

Ted P. Temzelides

Rice University

Multiple version iconThere are 3 versions of this paper

Date Written: December 5, 2011

Abstract

We study credible information transmission by a benevolent short-lived central bank. We consider two possibilities: direct revelation through an announcement, versus indirect transmission through monetary policy. We show that, in the presence of externalities creating a wedge between private and social welfare, the central bank prefers to mis-report its information in some cases. Private investors then might rationally ignore announcements by the central bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus lending an amount of credibility. This induces private investors to rationally take into account information revealed through monetary policy.

Keywords: Information, Interest rates, Monetary policy

JEL Classification: D80, E40, E52

Suggested Citation

Hoerova, Marie and Monnet, Cyril and Temzelides, Ted P., Money Talks (December 5, 2011). Economics Letters, Vol. 116, No. 3, pp. 617-621, 2012. Available at SSRN: https://ssrn.com/abstract=2046154 or http://dx.doi.org/10.2139/ssrn.2046154

Marie Hoerova (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Cyril Monnet

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Ted P. Temzelides

Rice University ( email )

99 Su
9999
Houston, TX Texas 77005
United States

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