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June 2011 issue
List of authors
 
Dale, Orphanides and Österholm
Blake and Kirsanova
Baeriswyl
Söderlind
Goodhart and Lim
Cao and Illing
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Endogenous Central Bank Information and the Optimal Degree of Transparency

by Romain Baeriswyl
Munich Graduate School of Economics and Swiss National Bank

Abstract

As a policymaker, the central bank both observes and shapes the economy. The central bank scrutinizes market activity to assess the state of the economy, and its policy strongly shapes market outcomes. When transparency allows the central bank to shape the economy more effectively, it may also cause the informational role of the economic aggregate to deteriorate. This paper presents a simple model to capture the endogenous nature of central bank information and to address welfare issues. First, accounting for the endogeneity of information highlights the detrimental effects of transparency. A model with endogenous information always calls for a lower degree of transparency than a model with exogenous information. Second, the optimal degree of transparency for endogenous information is unrelated to the accuracy of firms’ private information.

JEL Codes: D82, E52, E58.

 
Full article (PDF, 27 pages 241 kb)