Central Bank Transparency and the Crowding Out of Private Information in Financial Markets |
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Authors: | CLEMENS KOOL MENNO MIDDELDORP STEPHANIE ROSENKRANZ |
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Affiliation: | 1. Clemens Kool is a Professor at the Utrecht School of Economics, Utrecht University (E‐mail: c.j.m.kool@uu.nl).;2. Menno Middeldorp is at the Utrecht School of Economics, Utrecht University (E‐mail: m.h.middeldorp@uu.nl).;3. Stephanie Rosenkranz is a Professor at the Utrecht School of Economics, Utrecht University (E‐mail: s.rosenkranz@uu.nl). |
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Abstract: | We use an asset market model based on Diamond (1985) to demonstrate that increased central bank transparency may lead to crowding out of costly private information, which can result in a market that is less able to predict monetary policy. Consequently, for intermediate levels of public information precision, it is optimal for the central bank to actually disclose less than it knows. We show that such crowding out can occur, even in the likely scenario that public information is more precise than private information, under the plausible assumption that traders are nearly risk neutral. Central banks should be aware of possible adverse effects of transparency and take note if market participants reduce investment in information. |
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Keywords: | E43 E52 G14 monetary policy communication transparency information and financial market efficiency information acquisition |
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