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

Author

Listed:
  • Ahmad-Reza Jalali Naini

    (Institute for management and planning studies, Tehran)

  • Mohammad-Amin Naderian

    (Ph.D student at Allameh Tabatabaei University, Tehran)

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 overreaction via partial transparency or partial publicity.

Suggested Citation

  • Ahmad-Reza Jalali Naini & Mohammad-Amin Naderian, 2016. "Over-reaction to Policy Signals, and Central Bank Optimal Communication Policy," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 5(3), pages 165-187.
    • Handle: RePEc:cbk:journl:v:5:y:2016:i:3:p:165-187
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    File URL: http://www.cbcg.me/repec/cbk/journl/vol5no3-9.pdf
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    Citations

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    Cited by:

    1. Jonne Lehtimäki & Marianne Palmu, 2022. "Who Should You Listen to in a Crisis? Differences in Communication of Central Bank Policymakers," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(3), pages 33-57.

    More about this item

    Keywords

    Optimal communication policy; imperfect common knowledge; strategic complementarity; full transparency.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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