Communication and Monetary Policy.pptVIP

Communication and Monetary Policy Jeffery Amato, Stephen Morris and Hyun Song Shin Communication and Monetary Policy Central banks directly control only overnight rate, not prices that matter (long-term interest rates, other asset prices). Expectations determine prices that matter Communication shapes expectations (Blinder (1998), Bernanke (2004a, 2004b) Empirical studies: central bank talk moves markets Ben Bernanke (October 2004) “the value of more open communication is that it clarifies the central bank’s views and intentions, thereby increasing the likelihood that financial market participants’ rate expectations will be similar to those of the policymakers themselves” Dual Role of Central Bank Active, shaper of outcomes, influencing long-term rates, financial market prices Vigilant observer of events for cues for future actions (in order to be more effective in 1). Does emphasis on (1) detract from (2)? Two Channels of Transmission Conveying authoritative information on economic fundamentals and CB intentions Coordinating role, due to beauty contests in financial markets [other players’ beliefs about (1) matters] Ill-informed market players can exert influence Little scope for contrary opinion to find expression Events of Summer, 2003 Beauty Contests with Public and Private Information Welfare Effects of Public Information Hurdle precision is higher when private information is precise With cost of acquisition for private information, public information crowds out private information (Tong (2003)) Welfare loss due to public information is large when private and public signals have common error term (Tong (2004)) Modes of Communication Trade-off between Quantity of information Frequent speeches, testimonies by many speakers to possibly fragmented audiences Degree of common knowledge Official “platform”, such as inflation report but fewer, less informative disclosures Semi-Public signals Choose number of signals m to disclose Each signal reaches proportion