Heterogeneous private sector information, central bank disclosure, and stabilization policy

Abstract

Conventional wisdom has it that a central bank that uses an informational advantage to undertake active policy intervention can do as well, at least so far as real outcomes are concerned, by making its information publicly available and abstaining from stabilization. This notion is examined using a framework incorporating heterogeneous private sector information concerning aggregate demand shocks. An activist regime, in which the central bank exploits its own information to engage in stabilization, is found to be unambiguously superior to a noninterventionist regime, where the central bank maintains a constant setting of policy but publicly discloses its own information.

Central bank opacity and inflation uncertainty

“…1. See, for example Horváth and Vaško (2016), Papadamou et al (2014, 2015, 2017), Dai et al (2015), Demertzis and Hughes Hallet (2007, 2015), James and Lawler (2015), Papadamou and Arvanitis (2015), Dincer and Eichengreen (2014), de Mendonça and Galveas (2013), de Mendonça and Simão Filho (2008), and Geraats (2006).…”

Optimal Transparency and Policy Intervention with Heterogeneous Signals and Information Stickiness

“…The representative households utility is defined over consumption, described by a Dixit-Stiglitz aggregator over the varieties of differentiated goods, and leisure. The framework allows household welfare to be represented, as a second-order approximation, by the following: 5 4 The framework is also applied in James and Lawler (2015) to examine the consequences of heterogeneous information for the optimal policy regime. 5 For a derivation of this approximation see, for example, Woodford (2002) and Adam (2007).…”

“… The framework is also applied in James and Lawler () to examine the consequences of heterogeneous information for the optimal policy regime.…”

Central bank transparency and exchange rate volatility effects on inflation-output volatility

“…Another part of the literature considers that there is a relationship between 1 The issue of central bank transparency has been investigated extensively by the literature. Recent studies on central transparency are mainly focused on the relationship between transparency and independence of the central banks (Spyromitros, 2014), the effect of heightened transparency on stock returns via the interest rate (Papadamou et al, 2016), the effect of monetary policy opacity on macroeconomic efficiency in the presence of fiscal corruption (Dai et al, 2015), and James and Lawler (2015) explores whether public disclosure of the central banks information concerning aggregate shocks can serve as a substitute for active stabilization policy. 2 For a theoretical explanation of the favorable effects of central bank transparency on output and inflation volatility, see Demertzis and Hughes Hallett (2007) and Carboni and Ellison (2011).…”