Reducing overreaction to central banks' disclosures:theory and experiment

Romain Baeriswyl and Camille Cornand

No 2012-08, Working Papers from Swiss National Bank

Abstract: Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). We show that, in theory, both communication strategies are strictly equivalent in the sense that overreaction can be indifferently mitigated by reducing the degree of publicity or by reducing the degree of transparency. We run a laboratory experiment to test whether theoretical predictions hold in a game played by human beings. In line with theory, the experiment does not allow the formulation of a clear preference in favor of either communication strategy. This paper then discusses the opportunity for central banks to choose between partial transparency and partial publicity to control market reaction to their disclosures.

Keywords: heterogeneous information; public information; overreaction; transparency; coordination; experiment (search for similar items in EconPapers)
JEL-codes: C92 D82 D84 E58 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2012
New Economics Papers: this item is included in nep-cba, nep-cta, nep-exp and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2012-08

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