Observing and shaping the market: the dilemma of central banks

Camille Cornand (1) , Romain Baeriswyl (2) , Bruno Ziliotto (3, 4, 5)

1 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne
2 Swiss National Bank
3 CEREMADE - CEntre de REcherches en MAthématiques de la DEcision
4 CNRS - Centre National de la Recherche Scientifique
5 Université Paris Dauphine-PSL

While the central bank observes the market activity to assess economic fundamentals, it shapes the market outcome through its policy interventions. The more the central bank influences the market, the more it spoils the informational content of economic aggregates. How should the central bank act and communicate when it derives its information from observing the market? This paper analyses the optimal central bank's action and disclosure under endogenous central bank's information for three operational frameworks: pure communication, action and communication, and signaling action. When the central bank takes an action, it would be optimal for the central bank to be fully opaque to prevent its disclosure from deteriorating the information quality of market outcomes. However, in the realistic case where central bank's action is observable, it may be optimal to refrain from implementing any action.

Domaines: Économie et finance quantitative [q-fin]

Camille Cornand, Romain Baeriswyl, Bruno Ziliotto. Observing and shaping the market: the dilemma of central banks. Journal of Money, Credit and Banking, 2019, ⟨10.1111/jmcb.12682⟩. ⟨hal-01644269⟩