No abstract

Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to only a fraction of market participants (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). In theory, overreaction can be similarly reduced by either communication strategy. A laboratory experiment shows that both communication strategies succeed in reducing overreaction, though not as much as theory predicts. The opportunity in our information age for central banks to choose between partial publicity and partial transparency to control the market reaction is then discussed.

The weight assigned to public information in Keynesian beauty contests depends on both the precision of signals and the degree of strategic complementarities. This experimental study shows that the response of subjects to changes in signal precision and the degree of strategic complementarities is qualitatively consistent with theoretical predictions, though quantitatively weaker. The weaker response of subjects to changes in the precision of signals, however, mainly drives the weight observed in the experiment, qualifying the role of strategic complementarities and overreaction in experimental beauty contests.

Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). We show that, in theory, both communication strategies are strictly equivalent in the sense that overreaction can be indifferently mitigated by reducing the degree of publicity or by reducing the degree of transparency. We run a laboratory experiment to test whether theoretical predictions hold in a game played by human beings. In line with theory, the experiment does not allow the formulation of a clear preference in favor of either communication strategy. This paper, however, makes a case for partial transparency rather than partial publicity because the latter seems increasingly difficult to implement in the present information age and is associated with discrimination as well as fairness issues.

Camille CORNAND BETA UMR 7522 CNRSThis article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilising the price level and stabilising the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilisation of the output gap too heavily in its objective function.*