<abstract xmlns="http://www.w3.org/1999/xhtml"><p>This paper reviews the theoretical arguments and counter arguments regarding central bank optimal communication policy in an environment with imperfect common knowledge and strategic complementarity. More specifically, the paper discusses the environment in which full transparency is no longer necessarily the superior strategy. Uncertainty about the underlying economic state in the presence of dispersed information is the basis for the emergence of imperfect common knowledge. These issues are further discussed in an augmented Lucas-island model. Full policy transparency in this setting leads to overreliance to central bank public policy signals, resulting in the expectations coordination away from fundamentals - dubbed as over-reaction to central bank announcements. Optimal communication policy in this context entails strategies to limit over-reaction via partial transparency or partial publicity.</p></abstract>

This paper reviews the theoretical arguments and counter arguments regarding central bank optimal communication policy in an environment with imperfect common knowledge and strategic complementarity. More specifically, the paper discusses the environment in which full transparency is no longer necessarily the superior strategy. Uncertainty about the underlying economic state in the presence of dispersed information is the basis for the emergence of imperfect common knowledge. These issues are further discussed in an augmented Lucas-island model. Full policy transparency in this setting leads to overreliance to central bank public policy signals, resulting in the expectations coordination away from fundamentals - dubbed as over-reaction to central bank announcements. Optimal communication policy in this context entails strategies to limit over-reaction via partial transparency or partial publicity.

Over-reaction to Policy Signals, and Central Bank Optimal Communication Policy

Institute for management and planning studies, Tehran

Ph.D student at Allameh Tabatabaei University, Tehran

Journal of Central Banking Theory and Practice

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

{"article-title":"Over-reaction to Policy Signals, and Central Bank Optimal Communication Policy"}

This paper reviews the theoretical arguments and counter arguments regarding central bank optimal communication policy in an environment with imperfect common...

Over-reaction to Policy Signals, and Central Bank Optimal Communication Policy

Publicado en línea: 23 sept 2016

Páginas: 165 - 187

Recibido: 23 ago 2015

Aceptado: 15 may 2016

DOI: https://doi.org/10.1515/jcbtp-2016-0025

Palabras clave
Optimal communication policy, imperfect common knowledge, strategic complementarity, full transparency

© 2016 Central Bank of Montenegro

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Over-reaction to Policy Signals, and Central Bank Optimal Communication Policy

Publicado en línea: 23 sept 2016

Páginas: 165 - 187

Recibido: 23 ago 2015

Aceptado: 15 may 2016

DOI: https://doi.org/10.1515/jcbtp-2016-0025

Palabras claveOptimal communication policy, imperfect common knowledge, strategic complementarity, full transparency

© 2016 Central Bank of Montenegro

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Palabras clave
Optimal communication policy, imperfect common knowledge, strategic complementarity, full transparency