Observing and Shaping the Market: The Dilemma of Central Banks

29 Pages Posted: 2 Jul 2016 Last revised: 21 Feb 2018

See all articles by Romain Baeriswyl

Romain Baeriswyl

Ludwig Maximilian University of Munich

Camille Cornand

University of Lyon II; French National Center for Scientific Research (CNRS) - Institute of Economic Theory and Analysis (GATE)

Bruno Ziliotto

Université Paris Dauphine

Date Written: February 2018

Abstract

While the central bank observes the market activity to assess economic fundamentals, it shapes the market outcome through its policy interventions. The more the central bank influences the market, the more it spoils the informational content of economic aggregates. How should the central bank act and communicate when it derives its information from observing the market? This paper analyses the optimal central bank’s action and disclosure under endogenous central bank’s information for three operational frameworks: pure communication, action and communication, and signaling action. When the central bank takes an action, it would be optimal for the central bank to be fully opaque to prevent its disclosure from deteriorating the information quality of market outcomes. However, in the realistic case where central bank’s action is observable, it may be optimal to refrain from implementing any action.

Keywords: heterogeneous information, public information, endogenous information, overreaction, transparency, coordination

JEL Classification: D82, E52, E58

Suggested Citation

Baeriswyl, Romain and Cornand, Camille and Ziliotto, Bruno, Observing and Shaping the Market: The Dilemma of Central Banks (February 2018). Available at SSRN: https://ssrn.com/abstract=2803210 or http://dx.doi.org/10.2139/ssrn.2803210

Romain Baeriswyl (Contact Author)

Ludwig Maximilian University of Munich ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

Camille Cornand

University of Lyon II ( email )

93 Chemin des Mouilles
69676 Bron Cedex
France

French National Center for Scientific Research (CNRS) - Institute of Economic Theory and Analysis (GATE) ( email )

93 chemin des Mouilles
Monnaie et Finance at Lyon
69130 Ecully cedex
France

Bruno Ziliotto

Université Paris Dauphine ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

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