How Much Information Should Interest Rate-Setting Central Banks Reveal?

41 Pages Posted: 31 Jul 2006

See all articles by Charles Wyplosz

Charles Wyplosz

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR)

Aileen Gosselin-Lotz

University of Geneva - Graduate Institute of International Studies (HEI)

Pierre Gosselin

University of Geneva - Graduate Institute of International Studies (HEI)

Date Written: May 2006

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.

Keywords: Central bank transparency

JEL Classification: E42, E52, E58

Suggested Citation

Wyplosz, Charles and Gosselin-Lotz, Aileen and Gosselin, Pierre, How Much Information Should Interest Rate-Setting Central Banks Reveal? (May 2006). Available at SSRN: https://ssrn.com/abstract=921094

Charles Wyplosz (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5946 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://heiwww.unige.ch/~wyplosz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aileen Gosselin-Lotz

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Pierre Gosselin

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5926 (Phone)
+41 22 733 3049 (Fax)

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