October 2020

Central Bank Communication with a Financial Stability Objective

David M. Arseneau

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 & 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 & 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.

Keywords: Financial stability report, Information disclosure, Survey of economic projections, Time inconsistency problem, Transparency

DOI: https://doi.org/10.17016/FEDS.2020.087

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Last Update:
October 13, 2020