Private News and Monetary Policy - Forward Guidance As Bayesian Persuasion

47 Pages Posted: 20 Dec 2019

See all articles by Ippei Fujiwara

Ippei Fujiwara

Keio University

Yuichiro Waki

Aoyama Gakuin University; School of Economics, the University of Queensland

Date Written: December 20, 2019

Abstract

When the central bank has information that can help the private sector predict the future better, should it communicate such information to the public? In a simple New Keynesian model, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. In other words, it cannot persuade private agents to change their actions in favor of the central bank. In more elaborate DSGE models, the welfare effect may be either positive or negative, depending on the type of shock as well as distortions and frictions. These results suggest that improving welfare by Delphic forward guidance may be particularly difficult under model uncertainty.

Keywords: news shock, optimal monetary policy, private information, Bayesian persuasion, forward guidance, New Keynesian models

JEL Classification: E30, E40, E50

Suggested Citation

Fujiwara, Ippei and Waki, Yuichiro, Private News and Monetary Policy - Forward Guidance As Bayesian Persuasion (December 20, 2019). CAMA Working Paper No. 91/2019, Available at SSRN: https://ssrn.com/abstract=3507183 or http://dx.doi.org/10.2139/ssrn.3507183

Ippei Fujiwara (Contact Author)

Keio University

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

Yuichiro Waki

Aoyama Gakuin University ( email )

4-4-25 Shibuya, Shibuya-ku
Tokyo, 150-8366
Japan

School of Economics, the University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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