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Central Bank Transparency and the Signal Value of Prices

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Central Bank Transparency and the Signal Value of Prices

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    1. Central Bank Transparency and the Signal Value of Prices Stephen Morris Hyun Song Shin September 8th 2005 BPEA meeting

    2. Bank of England GDP Growth Fan Charts

    3. BoE August 2005 Inflation Report “A large part of the output revisions dated back several years, however. Their full effect on inflation should already have been felt. Yet inflation was unrevised and still thought to have been relatively well contained. So the bulk of those revisions do not seem to point to higher capacity pressures than previously judged.”

    4. July MPC minutes “For these members [who voted against rate cut], there appeared to be little risk in waiting for further data. Given the difficulty in explaining a reversal of a decision soon after a turning point, should that prove necessary in the light of future data, it was advisable to accumulate a little more evidence than usual before changing interest rates.”

    5. 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), Svensson and Woodford (2005), Woodford (2005))

    6. Ben Bernanke (2004) “when the monetary policy committee regularly provides information about its objectives, economic outlook, and policy plans, two benefits result. First, with more complete information available, markets will price financial assets more efficiently. Second, the policymakers will usually find that they have achieved a closer alignment between market participants' expectations about the course of future short-term rates and their own views.”

    7. When the central bank conveys its own views clearly, market prices will be more informationally efficient. When the central bank conveys its own views clearly, the market's expectations will be closer to the central bank's own expectations. But (1) may fail because (2) holds.

    8. 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)?

    9. Two Channels Conveying authoritative information on fundamentals Coordinating role, due to beauty contests [other players’ beliefs about (1) matters]

    10. Hayek-Lange Debate Prices are merely rates of exchange between goods (Oskar Lange (1937)). Signal value of prices (Hayek (1945))

    11. Anecdotal Evidence Deterioration of forecasts by central banks and private sector Flattening of Phillips curve Well-anchored nature of expectations as revealed in Surveys Market prices Overreactions

    12. Beauty Contests

    13. Lucas Phelps Island Economy

    14. Imperfect Competition

    15. Private and Public Information Public Signal Private Signal

    19. Asset Prices

    20. Forecasting Gaussian random walk Private signal of generation t

    21. Central Bank Signal Beauty contest Central bank’s signal

    22. No Disclosure Regime Signal

    23. No Disclosure Regime

    24. No Disclosure Regime Precision Steady state precision

    25. Disclosure Regime

    26. Disclosure Regime Precision

    27. Disclosure Regime Steady state precision

    28. Example

    29. Fan Charts (Again)

    30. Public Signal Precision

    31. Welfare Issues

    34. Coordination Elements in Welfare Angeletos and Pavan (2004) Hellwig (2004) Role of financial market prices in guiding investment (Polk and Sapienza (2003), Goldstein and Guembel (2004)).

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