Finance and Economics Discussion Series (FEDS)
October 2020
Central Bank Communication with a Financial Stability Objective
Abstract:
An endogenous financial crisis is introduced into the canonical model used to study central bank transparency. The central bank is endowed with private information about the real economy and credit conditions which jointly determine financial vulnerabilities. An optimal choice is made regarding whether to communicate this information to the public. A key finding is that the optimal communication strategy depends on the state of the credit cycle and the composition of shocks driving the cycle. From a policy perspective, this raises the possibility that central bank communication in the presence of a financial stability objective faces a time inconsistency problem.
Accessible materials (.zip)
Keywords: Financial stability report, Information disclosure, Survey of economic projections, Time inconsistency problem, Transparency
DOI: https://doi.org/10.17016/FEDS.2020.087
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.