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Private news and monetary policy - Forward guidance as Bayesian persuasion

Author

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  • Ippei Fujiwara
  • Yuichiro Waki

Abstract

When the central bank has information that can help the private sector predict the future better, should it communicate such information to the public? In a simple New Keynesian model, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. In other words, it cannot persuade private agents to change their actions in favor of the central bank. In more elaborate DSGE models, the welfare effect may be either positive or negative, depending on the type of shock as well as distortions and frictions. These results suggest that improving welfare by Delphic forward guidance may be particularly difficult under model uncertainty.

Suggested Citation

  • Ippei Fujiwara & Yuichiro Waki, 2019. "Private news and monetary policy - Forward guidance as Bayesian persuasion," CAMA Working Papers 2019-91, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2019-91
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2019-12/91_2019_fujiwara_waki.pdf
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    Citations

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    Cited by:

    1. Paloviita, Maritta & Haavio, Markus & Jalasjoki, Pirkka & Kilponen, Juha & Vänni, Ilona, 2020. "Reading between the lines : Using text analysis to estimate the loss function of the ECB," Research Discussion Papers 12/2020, Bank of Finland.
    2. Eunmi Ko, 2023. "Optimal Central Bank Forward Guidance," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 401-447, October.
    3. repec:zbw:bofrdp:2020_012 is not listed on IDEAS
    4. Tatsushi Okuda & Tomohiro Tsuruga, 2021. "Inflation Expectations and Central Bank Communication with Unknown Prior," IMES Discussion Paper Series 21-E-07, Institute for Monetary and Economic Studies, Bank of Japan.
    5. Paloviita, Maritta & Haavio, Markus & Jalasjoki, Pirkka & Kilponen, Juha & Vänni, Ilona, 2020. "Reading between the lines: Using text analysis to estimate the loss function of the ECB," Bank of Finland Research Discussion Papers 12/2020, Bank of Finland.

    More about this item

    Keywords

    news shock; optimal monetary policy; private information; Bayesian persuasion; forward guidance; New Keynesian models;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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