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Observing and Shaping the Market: The Dilemma of Central Banks
Author(s) -
BAERISWYL ROMAIN,
CORNAND CAMILLE,
ZILIOTTO BRUNO
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12682
Subject(s) - endogeneity , monetary policy , economics , dilemma , central bank , monetary economics , welfare , information asymmetry , forward guidance , microeconomics , market economy , inflation targeting , econometrics , credit channel , philosophy , epistemology
While the central bank observes market activity to assess economic fundamentals, it shapes the market outcome through the conduct of monetary policy. A dilemma arises from this dual role because the more the central bank shapes the market, the more it influences the informational content of market outcomes. This paper analyzes how accounting for the endogeneity of information affects optimal monetary policy. By reducing the accuracy of central bank information, endogenous information calls for a higher degree of opacity, weakens accommodation policy to shocks, and broadens the range of parameters for which taking a signaling action is detrimental to welfare.